Pre-Insolvency Moratorium in Kenya: Breathing Space for a Distressed Company

A pre-insolvency moratorium can give a distressed company limited breathing space while it assesses or pursues a viable restructuring. It is not a general freeze on every obligation, nor a licence for directors to continue trading without scrutiny. Entry conditions, notice, monitoring, creditor rights and termination are governed by the Insolvency Act, 2015 and the facts of the company. The key question is whether the moratorium protects a realistic rescue, rather than merely delaying enforcement.

Purpose and entry conditions

The moratorium is intended to create a short protected period in which the company can develop a restructuring proposal, secure funding, negotiate with creditors or decide whether another insolvency route is appropriate. Directors should first prepare current accounts, cash forecasts, creditor and security schedules, key contracts, tax position and a concise explanation of the intended rescue. A business with no viable funding, no recoverable value and no credible plan may not benefit from a statutory pause.

Entry should be supported by candid disclosure. Directors should identify urgent liabilities, secured creditors, employees, customer deposits, pending litigation and any prior insolvency steps. A short-term cash problem is not the same as a rescue case; the evidence should show why protection is needed and what will be done during it.

Directors remain responsible within the framework

Unlike administration, the company may continue under director management subject to the statutory framework and monitor involvement. That does not restore unrestricted freedom to deal with assets, incur debt or prefer selected creditors. Directors should maintain a daily cash position, preserve records, obtain authority for material transactions and keep the monitor informed of developments relevant to the moratorium.

The company should communicate accurately with staff, suppliers and lenders. It should not say that all debts have been written off or that every enforcement right has ended. The notice and Act determine the scope. A director who conceals a material change in funding, asset value or liabilities can undermine both the moratorium and creditor confidence.

Creditor rights during the breathing space

Creditors should identify the exact effect on their own rights. A secured lender, landlord, supplier with retention of title, employee or counterparty may have different questions about enforcement, continued supply, set-off or proceedings. Preserve the contract, security, statement and notice; seek consent or directions where the statute requires it. A creditor should not assume that a pre-moratorium debt can be recovered in the ordinary way while the protection applies.

At the same time, creditors should ask whether the moratorium is being used for its statutory purpose. A missing rescue plan, unexplained related-party payment, disappearance of assets or failure to provide required information may justify a prompt, evidence-based response. The appropriate remedy depends on the Act and facts, not on commercial frustration alone.

Monitor, notices and practical records

The monitor’s role is a safeguard for the process. The monitor needs reliable information about the company’s financial position and proposed course. Directors should provide the records promptly; creditors should use formal notices and documented questions rather than rely on rumours. Preserve the appointment or notice, cash forecasts, creditor list, monitor communications, funding evidence and any consent or direction.

A useful working record also identifies which payments are due during the moratorium, which contracts are essential, and what event will determine the next step: approval of a restructuring, new finance, administration, CVA, liquidation or termination. That discipline makes it possible to see whether the company is moving toward a solution or simply consuming time.

Expiry, challenge and the next step

The moratorium can end, be extended or be challenged through the statutory mechanisms. Timing matters. Directors should not wait until the final day to disclose that funding has failed; creditors should not wait until a valuable asset is gone before raising a material concern. Any application or challenge should identify the notice, factual change, statutory basis and practical relief sought.

A successful moratorium creates time for a credible restructuring. An unsuccessful one should lead promptly to the next lawful route, not informal drift. The proper outcome may be a CVA, administration, liquidation, refinancing or consensual settlement. The value of the process lies in the disciplined decision it enables.

Using the moratorium to prove, not merely promise, a rescue

The company should use the protected period to turn a broad rescue intention into evidence. A workable plan identifies the immediate cash need, source of funding, key contracts, expected creditor treatment, asset sales, management actions and the date by which a decision must be made. If a refinancing is proposed, identify the lender, term sheet, conditions and timing. If an asset sale is proposed, identify ownership, charge, valuation, buyer interest and net proceeds. A projected benefit without supporting material is not a reliable basis for asking creditors to wait.

Suppliers and customers may be central to whether the plan works. A supplier asked to continue should know who has authority to order goods, how new supply will be paid and whether pre-existing arrears are affected. A customer with property, deposits or an unfinished contract should be told the company’s current position without being given unsupported assurances. Directors should record essential commitments and avoid taking new obligations that the rescue forecast cannot support.

Secured lenders should examine the notice, security, default position and rescue proposal together. The moratorium may affect timing and enforcement, but it does not erase the security interest. A lender can ask focused questions about valuation, insurance, cash collateral, new finance and the likely next process. The company should not treat a lender’s forbearance as consent to an undisclosed transaction or extension.

Employees also need practical information. The company should identify payroll funding, essential roles, workplace safety, benefits and the authority for any change to terms. A moratorium intended to preserve a viable business can be undermined quickly if key staff leave because management has not communicated accurately. At the same time, directors should not suggest that a protected period guarantees continued employment where the plan remains uncertain.

At expiry, the company should be able to answer a simple question: has the moratorium produced a funded and lawful next step? If yes, the plan may move into the appropriate restructuring or insolvency mechanism. If no, directors and the monitor should consider the consequence promptly. Continuing without a viable path may increase losses and reduce the value available to creditors.

Breathing space is valuable only when it is used to make a disciplined decision. The moratorium protects the opportunity to test a rescue; it does not itself rescue the company.

Primary source: Insolvency Act, 2015.