Resuscitation of Companies, which way to go Receivership Or Administration

A. INTRODUCTION

1. In recent years especially during and immediately after the unprecedented Covid 19 pandemic, there have been numerous media reports of corporate entities facing a financial crisis. Financial distress in the corporate sector calls for which law is most appropriate in handling the insolvent entity in an attempt to salvage it and pay creditors. Receivership and administration are among the many ways in which creditors, mostly secured ones, use to recover value for their debentures/charges.
2. The applicable law to insolvency in Kenya currently is the Insolvency Act, 2015. The Act consolidated insolvency regimes and a reading of the Act clearly reveals that its spirit leans more on the rescue and redemption of insolvent corporate entities. The Insolvency Act 2015 alludes that assets of insolvent entities should only be sold as a last resort if the administration does not bear fruits.
3. The enactment of the Insolvency Act 2015 brought a little bit of confusion on the place of receivership under the new Act as the two are considered to be similar and sometimes even used interchangeably.
4. This article will clearly set out what receivership and administration have in common, what sets them apart and whether the two can run concurrently.

B. ADMINISTRATION

I. Key features

1. Governed by the Insolvency Act 2015;
2. The main objective is to enable entities to continue operating as going concerned so that ultimately, they may be able to meet their financial obligations to their creditors in full or at least to the satisfaction of creditors;
3. It targets honest but unfortunate debtors;
4. It is a rescue and redemption procedure;
5. Application for an administration order is made by a company, director or holders of floating charge and debenture;
6. Administration ends automatically after twelve months but can be extended by application to the court;
7. Once Administration is made, an automatic statutory moratorium is placed around the company to freeze all pending legal actions and prohibits the institution of new ones. xception to this is if the company is discovered to be engaging in actions that are against public interest e.g., running a pyramid scheme;
8. If administration cannot reasonably restore the corporate entity back to its glory, the next step is disposing of its assets and distribution of assets to creditors in order of their priority or ranking.

II. Advantages of Administration

1. Administration works best as a preventive measure rather than a cure
2. A company undergoing administration enjoys more good will from stakeholders i.e., creditors, licensing authorities, supplies etc since the company is seen to be trying to rescue the business.
3. The administration gives the administrator an opportunity to explore a number of options to generate money, inject capital and revive the operations of the company.
4. Administration offers a win-win solution to creditors and company owners as it gives the company a second chance to try and rebuild, pay back its debts and learn from its mistakes hence running the business in a better manner.
5. If the administration succeeds, it delivers higher returns to creditors from company assets and saves jobs. Its success has a positive impact on the company economically and socially.

III. How effective is Administration?

1. Administration can help in stabilizing a corporate entity in a deep financial crisis but only if the administrator is appointed early enough before the company gets knee-deep into the financial crisis. Most directors/managers of corporate entities are usually in great denial that the company is sinking financially such that by the time they are seeking the services of an administrator, the ship has already capsized.
2. There are however instances where the fish is rotten and it has started stinking such that even the involvement of an administrator will not be of any help. In such an instance, the company will have no other option but to close shop and start life afresh and as the proverbial saying goes, hope that maybe another door will open once this one is closed.

C. RECEIVERSHIP

I. The place of receivership after enactment of the Insolvency Act, 2015

1. Receivership is still governed by the Companies Act Cap. 486 (repealed) and not by the Insolvency Act 2015.
2. Section 690 (4) of the Insolvency Act provides that Section 690 does not apply to the holder of a floating charge that was created before the commencement of the Insolvency Act. Section 690 of the Insolvency Act provides for the appointment of an administrative receiver of the whole of the company’s property appointed by holders of any debentures of the company secured by a charge which, as created, was a floating charge, or by such a charge and other securities.
3. In addition to the above, Section 734 (2) of the Insolvency Act 2015 states that despite the repeal of the Companies Act cap. 486, any other provisions of that Act necessary for their operation, continue to apply to the exclusion of the Insolvency Act.
4. The Companies Act Cap. 486 (repealed) applies to any past event and to any step relating to that past event, even if it was a step or proceeding that was taken after the commencement. Past event as listed in Section 734 (1) (i) of the Insolvency Act includes the appointment of a receiver in respect of a company by debenture holders and debentures which created a floating charge over the assets of a company before the Insolvency Act 2015 was enacted.
5. By dint of the transitional provisions of the Insolvency Act 2015 mentioned above therefore, the provisions of the Insolvency Act 2015 and the Insolvency Regulations do not apply to receivership.

II. Key features

1. Governed by the Companies Act, Cap 486 (Repealed)
2. This option is only available to secured creditors whose debentures/charges were registered before the commencement of the insolvency Act, 2015.
3. Its main objective is swift disposition of assets which the loan facilities were secured. This happens immediately the corporate entity experiences financial challenges and are unable to service the loan facilities.
4. It is terminal to the business.
5. Receiver/receiver manager is appointed by the secured creditor. Directors of a company cannot place their own company under receivership.
6. Appointment of a receiver after 2015 is a none-issue as long as the debenture/charge was created before commencement of the Insolvency Act 2015.

III. Advantage

1. Secured assets are disposed of quickly hence there are higher chances of assets fetching a better price as opposed to first attempting to save the company.

IV. Similarity between Receivership and Administration

1. Repayment of debt is the primary objective.

D. DISTINCTION BETWEEN RECEIVERSHIP AND ADMINISTRATION

I. Outcomes

1. Receivership ends in termination of business and removal of the company in the company’s registry.
2. As for administration, a company can still recover and resume operations once administrator has successfully rescued the company and hands it back to the directors and shareholders.

II. Engaging in trading activities

1. Administration strives to keep the company afloat and can continue to trade.
2. Company under receivership cannot trade.

III. Whose interests are represented

1. An administrator in administration, acts on behalf of both the corporate entity and creditors in order to agree on payment terms beneficial to both parties. Duty is owed to all creditors.
2. A receiver/manager in receivership in most if not all instances purely represent interests of secured creditor who appointed the receiver.

IV. Termination

1. Administration ends automatically after twelve months but can be extended, whereas receivership has no timelines.

V. Secured creditors for charges/debentures created after the commencement of the Insolvency Act, 2015 can no longer appoint receivers/managers.

E. CAN RECEIVERSHIP AND ADMINISTRATION OF A CORPORATE ENTITY RUN CONCURRENTLY?

1. Yes, the two can run simultaneously especially in instances where there is great public interest e.g., where the insolvent entity is a public company/body. This was affirmed by Justice Mabeya in the landmark case of Kimeto & Associates Advocates v KCB Bank Kenya Limited & 2 Others (2021).
2. The court in the above case made an administration order and appointed the receiver appointed by the secured creditor as the administrator too. It was of the view that nothing in the Act prevented the running of administration and receivership concurrently when the objects of stakeholders were aligned and in agreement that the corporate entity should be revived.
3. The Court took cognizance of the fact that the dealings between the receiver, the debenture holder and the company was a private affair but the process of receivership was a matter of public interest because the rights of third parties for instance unsecured creditors, sugar farmers and employees were involved.
4. There is therefore a need for receivership to shift from the traditional approach and now balance between the interests of the secured creditors with that of equitable claimants such as other creditors, employees and the public. This is because the social and economic livelihoods of the public are significantly impacted by insolvency decisions..
5. The interests of the public should also be considered during receivership since their social and economic livelihoods are significantly impacted by insolvency decisions.
6. In this case, the Court noted that Mumias was not just an ordinary business enterprise but a public body and the largest sugar company in the region. Its collapse would therefore have dire social and economic consequences to the whole of Western Region.
7. In addition, the Court held that a receiver of a public body was bound by the national values and principles of governance as enshrined in Article 10 of the Constitution of Kenya of 2010.
8. The import of this decision is that receivers now have an obligation to be transparent and accountable while undertaking their duties in the receivership process. They are now required to disclose the particulars of the receivership process to third parties who are likely to be impacted by the insolvency procedure.
9. The Court further held that it had the jurisdiction to intervene in the receivership process and to supervise the actions of a receiver in order to take care of the public interest although in an unhindered manner.
10. The making of an administration order was in order for the court to monitor the activities of the administrator who was also the receiver as he will be required to report on their activities from time to time.
11. In conclusion, courts are leaning towards collective insolvency proceedings that involve all creditors, the public, employees and all other stakeholders notwithstanding the right of a debenture holder to enforce its security. Receivers appointed under these debentures must now balance the conflicting interests in the receivership process noting that the court has the jurisdiction to interfere in their decisions on account of public interest.

F. CONCLUSION

1. Receivership and administration though with more similar features as opposed to have distinctions cannot be used interchangeably as each is governed by a different law.
2. Receivership will however phase out with time as it is only applicable to charges and debentures created before the enactment of the Insolvency Act 2015.

Please be on the lookout for our next publication on insolvency as we explore mechanisms that administrators can apply to keep the companies as going concerns without any sale of the company assets.

This article is provided free of charge for information purposes only; it does not constitute legal advice and should be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary as set in the article should be held without seeking specific legal advice on the subject matter. If you have any query regarding the same, please do not hesitate to contact Conveyancing vide conveyancing@wamaeallen.com