Kenya’s businesses need to act earlier on financial distress

If Kenya is serious about creating a business environment that attracts investment and rewards enterprise, we need to change how we respond to financial distress.

Companies often enter formal insolvency proceedings too late. As a result, costs spiral and unsecured creditors are left with little, if anything, to show for it.

Administration was intended to give viable businesses breathing space to restructure and survive. In practice, many companies enter administration after the window for rescue has already closed. What follows is often a managed disposal of assets rather than the preservation of the underlying business.

One solution is greater use of pre-packaged sales, or “pre-packs”. A pre-pack involves negotiating the sale of a distressed company’s business or assets before formal insolvency proceedings begin, with the transaction completed once an administrator is appointed. This can contain costs, preserve value and minimise disruption to employees, customers and suppliers.

Used appropriately, and early enough, pre-packs could significantly improve outcomes for creditors in Kenya.

But the broader issue is timing.

Companies need to seek professional advice much earlier when signs of financial distress emerge. There is a common perception that restructuring advisers are expensive. Yet it is often the later-stage insolvency process – formal proceedings, litigation and investigations – that brings the truly substantial costs.

Earlier intervention, when a business still has options and negotiating leverage, is generally more cost-effective and gives directors a wider range of solutions.

For boards, this is ultimately an issue of good corporate governance. Financial distress should be treated as a business risk to be managed proactively, rather than a crisis to be addressed when options have already narrowed. By the time creditors have lost patience, suppliers have tightened terms or a statutory demand has arrived, significant value may already have been lost.

There is also a human cost to waiting too long. As financial distress deepens, employees often bear the consequences through delayed salaries, uncertainty over their jobs and, ultimately, job losses. Prolonged uncertainty can also cause key employees to leave, taking with them valuable institutional knowledge and weakening the business at precisely the point when it needs stability. Early intervention can therefore be critical, not only to preserve financial value but also to protect jobs and retain the people needed to keep a viable business operating.

There is also a wider structural issue that needs attention: the efficiency of our courts. Insolvency proceedings can become bogged down by court applications, adjournments and challenges that delay the process. In a distressed business, time is value. The longer proceedings take, the greater the risk that the value available to creditors and other stakeholders will erode.

Kenya should consider specialist insolvency courts, with judges experienced in commercial and restructuring matters. We should also explore appropriate measures to discourage frivolous challenges that serve primarily to delay insolvency proceedings while ensuring that genuine disputes can still be heard.

An effective insolvency regime is not simply about dealing with failed companies. It is part of the infrastructure of a competitive economy. A predictable and efficient framework gives investors confidence, allows creditors to price risk more accurately and gives viable businesses a better chance of survival.

Many of the tools we need are already within our reach. The real shift must be in how and when we use them. For boards and business owners, the message is simple: the earlier financial distress is confronted, the greater the chance of preserving companies, protecting jobs and safeguarding value for all stakeholders.

The Author, Joyce Mbui, is a partner and restructuring practitioner at Bowmans Kenya