Company Voluntary Arrangements in Kenya: Restructuring Debt Without Liquidation

A company voluntary arrangement (CVA) can allow a financially distressed company to restructure debt without immediate liquidation. It is not a private settlement imposed by directors: the proposal, creditor decision, nominee or supervisor and statutory effect must fit the Insolvency Act, 2015. A useful CVA gives creditors a better or more orderly outcome than the realistic alternatives; an unrealistic one merely postpones the company’s failure.

What a CVA is designed to achieve

A CVA is a proposal for dealing with the company’s debts and financial affairs. It may involve deferred payment, reduced repayment, asset sales, new funding, continued trading, a debt-for-equity outcome or another structured compromise. The proposal must say what is being offered, which creditors are affected, the funding source, timetable, costs, treatment of security and what happens if the company defaults.

Directors should compare the proposal with administration, refinancing and liquidation. A CVA is not automatically preferable because it leaves directors involved in the business. The central commercial question is whether the business can generate or receive enough value to perform the arrangement, and whether creditors will receive a credible result.

The nominee’s early role

The nominee examines the proposal and performs the statutory role before approval. The nominee needs current accounts, cash forecasts, creditor lists, security, tax position, employee liabilities, contracts, asset values and details of recent transactions. Missing records or optimistic projections should be identified rather than concealed. A nominee is not a marketing adviser for the directors; the role is part of the statutory safeguard for creditors.

A company should preserve records and avoid selective payments while the proposal is being prepared. A creditor should provide correct balance and security information. The proposal is only as reliable as the data on which it is built.

Creditor decision and the effect of approval

Creditors receive the proposal and make the decision through the statutory process. Notice, voting entitlement, proof of debt, proxies and the resolution record matter. A secured creditor and a creditor with a guarantee, set-off or disputed debt should identify that position early. A creditor should not vote solely from a headline dividend: it should test the assumptions, alternatives, funding, supervisor fees and treatment of its own claim.

The effect of approval follows the Act and terms of the arrangement. It should not be overstated. Rights against security, guarantors, co-debtors and third parties require separate analysis. The approved text, not informal negotiation notes, is the document that governs performance.

Supervision, default and challenge

After approval, the supervisor administers the arrangement in accordance with its terms and statutory duties. Creditors should receive the reports and payment information required by the process, while the company should disclose material changes in trading, funding, assets or liabilities. A missed payment, failed asset sale or lost contract should be addressed promptly through the arrangement’s variation, default or termination machinery.

A challenge should be based on a statutory ground, the decision or conduct complained of and evidence of prejudice or irregularity. It is not a second negotiation simply because one creditor wanted a better commercial outcome. Preserve the proposal, notices, voting material, reports and correspondence before seeking a remedy.

Making a CVA credible

A credible proposal contains a conservative cash forecast, identified funding, an asset and security schedule, clear creditor classes, realistic costs, contingency for failure and a reporting timetable. It identifies whether the company can trade during the arrangement and who has authority to make commitments. Directors should not use a CVA to hide a failing business, while creditors should not reject a viable restructuring merely because immediate full payment is unavailable.

The CVA’s value is its capacity to turn a creditor race into a supervised collective plan. That value depends on candour, informed voting and active supervision from start to finish.

Testing the proposal against liquidation and administration

The proposal should explain why creditors are better served by a CVA than by the realistic alternatives. That does not require a promise of full recovery. It requires a comparative analysis: likely assets in liquidation, costs, secured and preferential claims, value of continued trade, proposed funding, timing of distributions and risks if the plan fails. Creditors should ask whether the comparison uses conservative values and whether the company has identified all material liabilities, including tax, employee, landlord and customer claims.

Funding evidence is central. A proposed investor, asset sale, director contribution or future trading surplus should be supported by the relevant commitment, valuation, contract, forecast or bank evidence. A non-binding discussion may be useful background but is not the same as available money. The proposal should also explain what happens if the funding arrives late or does not arrive at all. A CVA with no credible default path can leave creditors worse off by consuming the period in which another remedy could have preserved value.

Creditor diligence should be specific. A secured creditor should identify the charge and value; a supplier should check retention-of-title and ongoing supply exposure; an employee should check wage and benefit information; a landlord should identify the lease and arrears; and a guarantor should review whether the arrangement affects the separate guarantee. These rights do not all receive the same treatment. The proposal and Act, rather than a generic description of “creditors”, determine the effect.

Implementation needs disciplined records. The supervisor should retain the approved proposal, creditor list, voting material, funding evidence, bank records, reports, payment schedule, asset-sale documents and notices of any variation or default. The company should provide current trading and cash information instead of waiting until a payment is missed. Creditors should retain distribution statements and correspondence, because an issue about compliance is easier to resolve from the approved terms than from later recollection.

A CVA can accommodate a changing business only if changes are addressed transparently. A material new contract, loss of a customer, revised asset value or change in funding may require a formal variation, creditor decision or another statutory step. Directors should not create an informal side deal with one creditor that defeats the agreed treatment of others. A creditor should not demand a private advantage as the price of supporting a collective restructuring.

A CVA is a controlled attempt to restructure debt without liquidation, not a way to defer an unavoidable collapse. Where the business no longer has viable funding or creditor support, administration or liquidation may be the more candid and value-preserving outcome.

Communication should be regular and accurate. Creditors need not receive every internal trading detail, but they should receive the reports and notices that allow them to understand performance against the arrangement. The supervisor should explain material delay, costs, distributions and any proposed change in terms. Silence can turn a manageable shortfall into a dispute about confidence and authority.

If the company defaults, the supervisor and creditors should return to the approved machinery rather than improvise. The relevant question is whether the arrangement can lawfully be varied and funded, or whether the company should move into administration, liquidation or another process. Prompt evidence-based action is more valuable than a series of informal extensions that leave every creditor uncertain.

Early professional advice is particularly important where security, employees, tax or guarantees are involved.

Primary source: Insolvency Act, 2015.