CREDIT MANAGEMENT
Are Company Insolvencies Soaring Up ?
By Wasilwa Miriongi
Apart from the reported cases , we do not have consistent reports of insolvencies in Kenya but this does not mean that it isn ’ t happening , there are many big firms mentioned as facing financial difficulties .
Quoting The East African Magazine headline “ Lean times as number of Kenyan firms facing liquidation doubles ” it is reported that the number of Kenyan firms facing liquidation more than doubled in seven years , highlighting weaknesses in the legal regime on insolvency . Restaurants have not been spared , the latest research analysis by Price Bailey ( Accountancy firm ) shows that at least five restaurants are closing daily in the United Kingdom
From the office of Official Receiver ’ s office , the number of companies under administration in Kenya at the end of 2021 was eight times higher than in the previous year , jumping from only two cases in 2020 to seventeen . However , the number of companies under administration thus far in 2022 has reduced to nine .
Comparing to United Kingdom as expounded in the journal “ Free Spot Today ”, the number of company insolvencies in England Wales have soared 40 % in May 2023 compared to May 2022 , with 2,552 companies failing in the month .
It is a known fact that if a company is unable to pay its debts and therefore insolvent , then the company may either be voluntarily or involuntarily liquidated without first being placed under administration .
Under Kenyan employment laws , a company is deemed to be insolvent in four scenarios : If the employer has a winding-up order or an administration order made against it ; If the company has passed a voluntary resolution for winding up ; If a receiver manager has been appointed ; or If a holder ( creditor ) of any debenture secured by a floating charge of the company ’ s assets has taken possession of the company ’ s property
What does this mean for your business ?
Such a significant rise in companies going bust should be sounding off alarm bells . It has consequences for the Kenyan economy as a whole and could have a direct impact on your own business . If your customers are other businesses then there ’ s a serious risk these customers could be at risk of insolvency , even if you do not perceive your own business to be threatened with closure . The consequences of business insolvency can manifest themselves in various ways .
The unprecedented rise in unpaid invoices
When many businesses close , the balances they owe in terms of unpaid invoices will likely be lost , given the parasitic nature of businesses this will no doubt trigger a chain reaction across sectors as their suppliers then lose out and may then have difficulties themselves paying their overheads . The spillover effect may easily be felt by your company as well .
Risk of honoring contractual obligations
Some businesses that may have running contracts or agreements with the insolvent company may face challenges . These contracts may be terminated or renegotiated during the insolvency process , impacting greatly on revenue and future business prospects . As a business owner this will greatly affect your business
Effect on company reputation and confidence
Companies always build reputation over time and develop a level of confidence based on their credulity therefore , corporate insolvencies can badly shake investor and consumer confidence in the affected industry or sector . The failure of a highprofile company can lead to a loss of trust in other businesses operating within the same market and industry , making it harder for them to attract investment or maintain customer loyalty .
The general industry Impact
In certain cases , the insolvency of a major player in an industry or if it happens in a highly fragile industry like financial sector can have a ripple effect on the entire sector . This can lead to market consolidation , reduced competition , and increased barriers to entry for new businesses , making it more challenging for other companies to thrive or lack of confidence in the entire industry . Take a case of a bank , one bank failure can span off many bank runs leading to a contagion .
Creating opportunities for Competitors
There is an adage that if the grasshoppers are fighting the predators will have a field day . Insolvencies can create opportunities for competitors to expand their market share , acquire assets or intellectual property , or attract talent from the failed company . Competitors may also benefit from reduced competition and potentially higher pricing power .
All said and done it depends on the extent to which companies and sectors rely heavily on any given organizations before it goes bust . If reliance on a business is high - the famous sales or supply concentration factor - then the insolvency risk will be high too and the effect can be dramatic . Dealing with insolvencies can be extremely stressful and can have wide ramifications on the overall business operations .
Wasilwa Miriongi is a Certified Credit Professional currently working as the Managing Director , Del Creder Credit Management Limited . You can engage him on this or related matters via email at : WMiriongi @ gmail . com .
84 MAL55 / 23 ISSUE