Creditors and management of distressed companies are being advised to call in administrators early to enhance chances of reviving the businesses.
Insolvency practitioners want firms facing challenges to not leave it until late to turn to administrators since this could be a recipe for liquidation as opposed to resuscitating operations.
Mr Julius Ngonga, Ernst & Young partner in charge of - East Africa transaction advisory services and infrastructure, says it is unfortunate that many companies wait until the problem is almost insurmountable.
Mr Ngonga, who is among 22 licensed insolvency practitioners in Kenya, adds that survival chiefly depends on timing of the appointment of administrator and co-operation from directors when told to relinquish management roles.
“Late call is typically what happens at the moment. You find the company has been kicking the can down the road far too long until the problem becomes insurmountable,” said Mr Ngonga in an interview with Smart Business.
“If you call the experts early to work out a solution on issues such as cash diversion, it will work. And if they come in and discover there is no case for business, then asset value will actually be preserved.”
Under Insolvency Act 2015, companies in financial distress have been using the legislation to ensure they remain a going concern as opposed to an outright basket case.
But early adopters such as Spencon Kenya Limited, Nakumatt Holdings, Midland Energy, ARM Cement and Deacons East Africa are all yet to come back, pointing to risk of late appointment of administrators.
Administrators usually come in to try and save the company and recommend measures such as sale of non-core assets, reduced debt, venturing into new markets or exiting some lines of business.
However, Mr Ngonga says the success is also dependent on co-operation from creditors, especially lenders. This is because many businesses require working capital and banks have to provide it so as to keep the business running.
Mr Julius Ngonga, partner EY Transaction Advisory Services.
Photo credit: Francis Nderitu | Nation Media Group
“The stumbling blocks are around getting co-operation from the management since we need to understand what went wrong. Working capital is also an issue since creditors are usually wondering why they should add money to a company under receivership,” said Mr Ngonga last week in an interview.
The first 60 days are usually critical since an administrator has to look at the business, prepare a statement of affairs and invite creditors to a meeting and table options to them.
Options usually offer an analysis of what creditors stand to lose or gain for taking decisions such as closing the businesses, exiting some markets or dropping some business lines. Creditors then take a vote on the proposals.
“The lenders have to step in and provide the working capital. Otherwise there is no point. They better just appoint a liquidator straight away,” advises Mr Ngonga.
For many businesses, the common thread is usually constrained working capital, too much debt, diversion of money to other business and bad management.
With the Covid-19 disruption having hit many businesses, creditors are being asked to be on high alert so as to take the right steps in saving firms that may struggle to keep lights on.
Companies can apply for voluntary administration or wait for creditors to trigger the process. But many times, it is the banks that have led the way.
Most appointments of administrators are initiated by senior lenders looking for their money but administrators come in to work for the best outcome to all creditors.
“We are likely to see more appointment of administrators in Covid-19 era with difficulties that many firms have faced. Some businesses will come back and others will surely die. That is a fact,” says Mr Ngonga.
But with law barely five years, many creditors and company directors are still trying to understand it. Sometimes the court has had to step in and offer clarity on some clauses.
