Introduction
Running a business comes with inherent risks, and sometimes even profitable companies face periods of financial difficulty. If your company in Kenya is struggling but not yet insolvent, there are several legal and strategic options to consider to stabilize operations and safeguard your business.
It is a stressful position to be in, but the fact that your company is struggling but not insolvent is actually a critical window of opportunity. Understanding the options available early can mean the difference between recovery and eventual insolvency.
Assessing Your Financial Situation
Before taking any legal or strategic action, you must understand your company’s financial health. Review cash flows, outstanding debts, and ongoing obligations. Identify which losses are temporary and which may indicate deeper structural problems. A realistic understanding of your financial situation provides the foundation for informed decision-making.
Debt Restructuring and Negotiation
If your company can meet obligations with some relief, consider negotiating with creditors. Kenyan law allows businesses to enter into informal debt restructuring agreements, which may include:
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extending repayment periods.
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reducing interest rates.
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Agreeing on partial settlement of debt.
Such negotiations are often faster and less costly than formal insolvency procedures. Creditors generally prefer restructuring to a full insolvency scenario, as they may recover more.
Statutory framework for corporate rescue and financial restructuring
For a company that is currently struggling but has not yet reached the threshold of terminal insolvency, the law provides an array of mechanisms designed to preserve the business as a going concern, protect assets from aggressive creditor enforcement and facilitate the orderly restructuring of financial obligations. These include the following:
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The Pre-Insolvency Moratorium
The pre-insolvency moratorium is a statutory mechanism to provides financially distressed companies with breathing-space to explore rescue options before formal insolvency proceedings commence.
Any financially distressed company may apply for a pre-insolvency moratorium. However, this option is not available to banks, insurance companies, and companies which are already undergoing administration, liquidation, administrative receivership or voluntary arrangements. Similarly, companies that have obtained a moratorium within the 12 months preceding the application, as well as project companies engaged in public-private partnership projects, are excluded.
A moratorium takes effect when the requisite documents are lodged with the Court and, unless extended, ends thirty days from and including the day it takes effect. If the provisional supervisor fails to convene either meeting within the required period, the moratorium ends at the end of the last day of that period.
During the period the moratorium is in effect, the Insolvency Act imposes significant restrictions designed to prevent the dismemberment of the company's asset base while a plan is formulated. They include the following:
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no application for liquidation can be made against the company.
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meetings may only be convened with the monitor’s consent or with court’s approval.
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no legal proceedings may be commenced or continued.
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security cannot be enforced without court leave.
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a resolution for the liquidation of the company has no effect and the Court may not make an order for the liquidation of the company.
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no application for an administrator may be made and appointments of administrators or administrative receivers are prohibited.
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landlords or rent payees may not exercise forfeiture rights over company premises without Court approval, which may come with conditions.
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goods under credit purchase cannot be repossessed without leave.
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Company Voluntary Arrangements (CVA)
A Company Voluntary Arrangement (CVA) is a formal rescue mechanism provided under the Insolvency Act that allows a company to restructure its debts by proposing a compromise or a scheme of arrangement to its creditors. For instance; debt forgiveness, reduced interest or extended payment timelines.
A CVA can be initiated by the directors of a company, or by an administrator or liquidator if the company is already in a formal insolvency process. The core of the CVA is the Proposal, which must include information on debt restructuring, repayment terms, potential debt-to-equity conversions, and the appointment of an authorized insolvency practitioner to act as the Supervisor, ensuring the company sticks to the agreed repayment plan.
The Proposal must be accompanied by a statement of the company's financial position, itemizing its assets, liabilities, and the particulars of its creditors. Where the Provisional Supervisor is neither the administrator nor the liquidator and no moratorium is sought, the provisional supervisor is required to submit a report to the Court stating whether the proposal has a reasonable prospect of being approved and implemented, and whether meetings of members and creditors should be convened.
If the provisional supervisor reports that meetings should be held, the supervisor must convene meetings of the company and its creditors to consider the proposal. At the creditors’ meeting, creditors are categorised into secured, preferential, and unsecured groups for voting purposes. The purpose of these meetings is to determine whether to approve the proposal, with or without modifications, provided that any modification is consented to by the company. Proposals affecting the enforcement rights of secured creditors are subject to strict protections, ensuring that dissenting secured creditors are no worse off than they would be in liquidation and that statutory priority rules are respected.
A proposal is approved if it receives the requisite majorities at the company meeting and within each class of creditors, though the Act permits approval by creditors alone even where shareholders do not approve. The Court retains ultimate supervisory authority and may approve a proposal notwithstanding dissent by certain creditor groups, provided that secured creditors support it, creditor priorities are respected and no group is unfairly prejudiced.
Once the Court approves the proposal, the voluntary arrangement becomes binding on the company and every person, including secured and preferential creditors who was entitled to vote at the meeting, regardless of whether they participated in the meetings. This binding nature prevents hold-out creditors from frustrating the rescue plan.
Once the arrangement takes effect, the provisional supervisor becomes the supervisor of the voluntary arrangement unless replaced. Where the company is in liquidation or administration, the Court may stay or suspend those proceedings to facilitate the implementation of the arrangement.
A significant feature of the CVA is that, unlike administration, the existing directors typically remain in control of the day-to-day operations of the company, which can preserve business continuity and customer relationships. However, the Insolvency Act allows an aggrieved creditor to challenge the CVA in Court on the grounds that it unfairly affects their interests or that there was a material irregularity in the meetings.
Overall, the voluntary arrangement regime offers a structured, court-supervised mechanism for corporate rescue, balancing flexibility in debt restructuring with creditor protection, procedural fairness, and judicial oversight.
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Company Administration
Administration is the most robust and a more intensive rescue tool available under Kenyan insolvency law. It involves placing the company under the management of a licensed insolvency practitioner known as an Administrator, with the primary goal of maintaining the company as a going concern or achieve a better result than liquidation.
The Administrator is legally mandated to perform their duties with the following objectives in order of priority:
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to maintain the company as a going concern.
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to achieve a better outcome for the company's creditors as a whole than would be likely if the company were liquidated without first being under administration.
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to realize the property of the company in order to make a distribution to one or more secured or preferential creditors.
An administration order places the company under a statutory moratorium that bars or suspends liquidation and other enforcement actions, thereby preserving the company while restructuring is pursued. Once an administration order is made, no fresh application, resolution, or court order for liquidation may be made, and any pending liquidation application is automatically suspended for the duration of the administration, save for applications brought. During this period, creditors and other parties are also restrained from enforcing security, repossessing goods under credit purchase arrangements, exercising a landlord’s right of forfeiture by peaceable re-entry, or commencing or continuing legal proceedings against the company or its property, unless they obtain the consent of the administrator or the approval of the Court, which may be granted subject to conditions.
The administrator's term automatically ends after 12 months, although this may be extended by the Court for a specified period or by creditor consent for a period not exceeding six months.
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Schemes of Arrangement
A Scheme of Arrangement is a statutory procedure under the Companies Act, 2015, that allows a company to make a compromise or arrangement with its creditors or members. This mechanism is often used for complex financial restructurings, such as debt-to-equity swaps.
The process for implementing a compromise or arrangement begins with an application to the Court under Section 923, requesting that meetings of the company’s creditors, members, or relevant classes be convened to consider the proposed scheme. At these meetings, the scheme must secure approval from a majority in number representing at least 75% in value of the creditors, members, or relevant class who are present and voting. Once these statutory majorities are obtained, the company must apply to the Court for a Sanction Order. The Court will then assess the scheme to ensure it is fair and equitable, and that all legal requirements have been properly satisfied.
Unlike a CVA, where the creditors’ approval can sometimes bind members without their consent, a Scheme of Arrangement typically requires separate class approvals. The Sanction Order must be filed with the Registrar of Companies to become effective.
Conclusion
The Insolvency Act, 2015 has fundamentally reshaped Kenya’s commercial landscape, replacing the traditional mindset of immediate liquidation with a sophisticated rescue-first framework. For directors, these statutory tools represent a critical shift in fiduciary responsibility; the law now provides a clear path to preserve viable businesses, safeguard jobs, and maintain economic stability through early and professional intervention.
The Act provides a tiered approach to corporate distress, allowing management to select the tool most appropriate for their specific financial situation. The Pre-Insolvency Moratorium serves as a vital first-response tool, providing small companies with an immediate, low-cost legal shield to stabilize operations without the complexities of full administration. Company Voluntary Arrangement (CVA) empowers directors to retain operational control while negotiating a binding compromise with creditors. This debtor-in-possession model is the most effective way to restructure debt while preserving management expertise. Administration remains the gold standard for complex turnarounds. It provides the robust protection of a court-mandated moratorium, allowing a licensed Insolvency Practitioner to maximize value for the collective creditor body, often resulting in a superior outcome compared to a forced auction.
Beyond business continuity, these tools serve as a vital defense against personal liability. By proactively invoking a formal rescue process, directors demonstrate a commitment to minimizing losses to creditors, the core requirement for a statutory defense against claims of wrongful trading. Silence and inaction are no longer legally viable options; once a company enters the zone of insolvency, the strategic use of these tools becomes a mandatory exercise in corporate governance.
Ultimately, corporate failure is no longer an inevitable end, but a manageable financial state. The success of a rescue depends on two factors; the speed of intervention and the quality of professional advice. By engaging early with professionals, directors can pivot from the risk of personal prosecution toward the successful rehabilitation of the enterprise.
How We Can Help You
Navigating financial distress while avoiding insolvency requires timely, strategic, and legally compliant action. At our Corporate Restructuring and Special Situations Practice (CRSS Practice), we provide comprehensive support to companies facing such challenges, helping directors and management make informed decisions to protect the business and their personal interests.
Our services include:
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Financial & Legal Assessment: Review of cash flow, debts, and obligations to guide decision-making.
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Debt Negotiation & Restructuring: Negotiating with creditors for extended terms, reduced interest, or partial settlements.
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Pre-Insolvency Moratorium: Assisting with applications to secure temporary protection from enforcement actions.
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Company Voluntary Arrangements (CVA): Preparing and supervising binding debt compromise proposals.
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Administration & Schemes of Arrangement: Guiding complex restructurings to preserve business value and continuity.
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Ongoing Advisory Support: Ensuring compliance, operational improvements, and proactive risk management.
If you would like to consult on this article or any other related matter, you may contact the contributors on the emails below or the Corporate Restructuring and Special Situations Practice team via email at crsspractice@cmadvocates.com. Do also visit our website https://cmadvocates.com for more information about us and our services.
Contributors
Caiphas Chepkwony, Associate – cchepkwony@cmadvocates.com
Amos Lekakeny, Pupil - alekakeny@cmadvocates.com
Disclaimer: This publication is for informational purposes only and does not constitute legal advice. For tailored legal support, please consult our team.