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PRE-INSOLVENCY MORATORIUM The Stopgap Solution for Financially Distressed Companies

CM Advocates > Legal News  > PRE-INSOLVENCY MORATORIUM The Stopgap Solution for Financially Distressed Companies

PRE-INSOLVENCY MORATORIUM The Stopgap Solution for Financially Distressed Companies

The existence of any business depends on how best it is managed, and the strategies put in place to ensure its eternity. To stay in business and possibly grow, companies take credit which in some instances remain unpaid when a company is facing financial challenges. As a result of this, a company can be declared insolvent.

Fortunately for many businesses, on 30th March, 2021, President Uhuru Kenyatta assented the Business Laws (Amendment) Act, 2021. The statute comes with several amendments geared towards easing trade in Kenya. Notably, the Business Laws (Amendment) Act, 2021 has amended the Insolvency Act, 2015 by introducing pre-insolvency moratorium for financially distressed companies with the intention of keeping businesses alive.

Pre-insolvency moratorium acts as an emergency mechanism meant to offer debtor companies whose fundamentals are still strong some breathing space. This way, companies can come up with informal restructurings, or formal insolvency procedures with its creditors.

To apply for a pre-insolvency moratorium, the directors of the company file documents specifying why a moratorium is the desirable route. In addition, the directors have to attach a statement from the proposed licensed insolvency practitioner (known as a monitor) indicating that the moratorium has a chance of achieving its goal and that the company has funds available to fund it during the moratorium period to continue with the business.

If successful, the moratorium is granted on the first instance for 30 days. However, the moratorium can be extended for a further period of at least 30 days if the Court believes that the extension is desirable in order to achieve the aim for which the moratorium was initially obtained.

It is important to note that a company need not to be insolvent to obtain a pre-insolvency moratorium, thus, any financially distressed business can take advantage of the moratorium. However, pre-insolvency moratorium is not available to companies already in administration (inclusive of provisional liquidation), or those which the administrative receiver has been appointed. Companies that already have an active moratorium or currently subject to a company voluntary agreement (CVA), 12 months before the application date are equally ineligible. Notably, in instances where a liquidation application has been made before Court, but the liquidation order is yet to be issued, the company can qualify for a pre-insolvency moratorium.

Business benefits of a pre-insolvency moratorium:

  1. Protects the business while plans are developed, by either financial restructuring or general company restructure to maintain the company as a going concern;
  2. Allow directors to retain control as the company continues to trade and offer the company space from creditors;
  3. Protects assets and trade of the entity from any legal action by creditors; and
  4. Preserves and maintains the goodwill of the business while a strategy is formulated by the directors.

Business benefits of a pre-insolvency moratorium:

  1. A company with a pending winding-up petition filed in court, and requires space to collect debts, secure investments from either shareholders or funding;
  2. A company with statutory demands against it and needs protection from creditors for a temporary period, as the situation is resolved; and
  3. A company that is actively trading, and has enough cash flow to settle current debts when due, but not its historic debts.

In conclusion companies that have plunged into financial distress due to the harsh economy impacted by COVID-19 can take advantage of pre-insolvency moratorium. The company will benefit from the grace period that allows it to restructure and strategize on how to survive turbulent economic times, rather than pulling the plug on its existence on the first instance.

In case of any queries or if in need of any clarification, do not hesitate to contact the undersigned or route your queries through drri@cmadvocates.com and +254716209673.

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