For some Kenyans, the term administration on an insolvent company is synonymous with liquidation or dissolution. As such, most companies that file for an administration end up acquiring the tag of being ‘broke’ from the public and media. The consequences of this are it scares away partners, with investors being scared as they may fear investing in a company that cannot pay its creditors.
What is administration?
However, an administration is more positive than it has been made to look. The administration of an insolvent company refers to putting such an organization under a competent manager to restore normalcy and help the company meet its financial obligations, according to Koya & Company Advocates.
Once a company has been put under administration, the administrator oversees all its activities with the sole aim of ensuring that it repays all its creditors in a period of uninterrupted activities. In a nutshell, the administration seeks to ward off the extreme consequence of liquidation.
Advantages of administration
Good for creditors
Liquidation (the process by which a company distributes its assets to creditors and claimants) is always a chaotic endeavour. This is because creditors seek to regain their investments in whichever way possible, which is not always possible in the end. Thus administration helps to forge a smooth distribution of investors’ dues through the watch of the assigned administrator.
An Administration also saves jobs for employees working under the insolvent company and its affiliates. The failure to put an insolvent company under administration will likely lead to the total dissolution of the company in the aftermath. Thus, employees are assured of their jobs when their company is under administration and trying to get back on its feet.
An administration period is always a sigh of relief to the insolvent company since it enjoys a spell of legal immunity. The creditors are barred from taking any legal actions against the entity, especially the push for liquidation. However, a court can rule in favour of a creditor seeking liquidation if the administrator declares that the company cannot meet its obligations even by the lapse of the administrative period.
This is the main reason why a company seeks administration. An entity gets the freedom to restructure its operations undisturbed, which includes doing away with unnecessary spending. Such restructuring is impossible when a company is operating under the threat of liquidation.
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