Corporate Insolvency: Administration-death By A Thousand Cuts Or Corporate Rescue Measure?

The Black’s Law Dictionary, 9^th Edition, defines administration as the management or performance of the executive duties of a government, institution, or business. The concept of Administration under the Insolvency Act, No. 17 of 2015 replaced the previous model of appointing receiver / manager under the Companies Act Cap 486 . While there exists a lot of similarities between the two models, administration under Part VIII of the Insolvency Act, 2015 is intended to fill in the gap where previously the receiver principally answerable to the debenture holder to the detriment of other creditors. The concept of administration also grants a company a standstill period where the creditors of a Company are estopped from taking adverse actions against the Company under Administration. According to Mativo J. in I & M Bank Limited v ABC Bank Limited & another eKLR, the introduction of the device of Administration to replace the receiver(s)/managers(s) under the Companies Act (Repealed) allows distressed companies to be given a “breathing space” so that they remain going concern. The objectives of administration under Section 522 of the Insolvency Act are listed in order of priority. This means that the administrator must first undertake his duties in the best way possible to maintain the company as a going concern. However, where the Administrator believes that it is not reasonably practicable to achieve that objective, the administrator has a duty to manage the company’s affairs in a manner that achieves a better outcome for the company's creditors as a whole than would likely to be the case if the company were liquidated. Whether or not a company is rescued depends on the circumstances of each case. Administration of a Company does not connote an automatic rescue of the Company. Most companies under Administration end up taking the liquidation route for several reasons including but not limited to inability to satisfy its debts, and inability to achieve the objectives of administration. Administration, nonetheless, has a number of advantages as compared to other insolvency methods as it helps to facilitate the maintenance of a company as a going concern, the company is granted an automatic moratorium which allows the administrator to come up with a viable rescue plan, the company is protected from its own management and placed in a better position for the realization of its assets and is protected from a corporate death by liquidation. The administration process is also less adversarial as compared to liquidation. It is protective of the company’s interests and those of its creditors, as a whole.

What is the effect of granting an Administration order?

Once an administration order is made, the financially distressed company is granted an automatic moratorium on other insolvency proceedings and legal processes including, the enforcement of rights against the company by secured creditors or otherwise. This moratorium allows the Administrator to propose a rescue plan to restore the company to a profitable position and avoid liquidation. Administration orders are made with the primary focus being to revive the company by protecting it from the management that occasioned its failure in the first place. The company is therefore placed in the hands of a qualified insolvency practitioner who is accountable to the Law, the Insolvency Court, the creditors and the corporate debtor. A major principle in Administration is that the rights of secured creditors remain intact and cannot be impaired by the other creditors.

Disadvantages of Administration

While corporate rescue is at the heart of administration, in some instances, restructuring the company may not be possible and the Company may end up moving from administration to dissolution. Some of the disadvantages of administration include: -

1. Administration has proved to be expensive as compared to the traditional receivership model;
2. Once a Company enters administration, the proceedings could catalyze contractual provisions that would be detrimental to the company’s interest. Case in point; termination of the contract especially in instances where creditors are not willing to waive the strict compliance of the contract; and
3. Insolvency proceedings are class actions that require advertising to the public and this poses a reputational and operational risk to a Company.

Additionally, a company’s entry into administration triggers the start of a new period of accounting with effect from the previous day. The impact of this is that the trading losses made in the period before administration can only be set off against the profits made during the same period (including capital gains), not against gains made after the company enters administration. Based on the foregoing, before appointing an Administrator or seeking an administration order in Court, a creditor or the director of a distressed company has to satisfy themselves as to whether the conditions for the appointment of an administrator have been met. As held by the Court in Flamco Limited v Prime Bank Limited eKLR, administration proceedings should only be considered where it is reasonably probable that the company is viable and capable of ultimate solvency and that it could, within a reasonable time, become a successful concern by providing a better return for creditors.

Conclusion

Administration enables the company through the Administrator to come up a rescue plan to restore the company to a profitable position and avoid liquidation. This is further espoused by Section 522 of the Insolvency Act which lists the objectives of Administration in priority. It is thus imperative for the Administrator to endeavor to first maintain the company as a going concern.

How can we help?

The Debt Recovery Restructuring and Insolvency team at CM Advocates LLP prides itself in having a wide variety of resources, skills, and experience on matters of Insolvency including but not limited to Company’s Administration. We can also help in terms of mergers and acquisitions, Limited liability partnerships (LLP’s) having a high end client portfolio. We are practical and innovative in our approach and offer quick turnaround timelines. We will be delighted to receive your feedback, and inquiries and offer our services on this and any other of our practice areas.

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