Why dearth of insolvency practitioners should not lead to death of your firm

The Central Bank of Kenya in Nairobi. Dennis Onsongo
Photo credit: Nation Media Group

What you need to know:

  • Banks are increasingly getting their good customers with stellar records struggling to meet loan repayments.
  • According to the CBK Monetary Policy Committee statement, lenders have restructured loans worth Sh844.4 billion which is a third of the total outstanding loan book of Sh2.9 trillion between March and June this year.
  • Despite the few specialists in reviving collapsing companies, here is how one can navigate the tough Covid-19 times and come out a winner

Kenya has 25 neurosurgeons who can with precision, open up your brain as part of the very elite specialists but only 20 authorised insolvency practitioners to diagnose ailing businesses and recommend a rescue plan.

According to the official government receiver, the morticians handled 25 bankruptcy petitions, 42 liquidation cases, seven voluntary liquidations, four administrations, two receiverships, two no asset procedures, two summary instalment orders and one application for voluntary arrangement last year.

With the outbreak of Corona virus, Kenya can look at the world just to see the unprecedented number of cases that are waiting to happen.

According to legal consultancy Epiq, in the first half of 2020 over 3,600 companies filed for bankruptcy in the US including Hertz, Chuck E. Cheese, Lord & Taylor, Men’s Wearhouse, California Pizza Kitchen, Diamond Offshore and Whiting Petroleum.

Banks are increasingly getting their good customers with stellar records struggling to meet loan repayments.

They have two options, accept that times are hard and restructure or go for the jugular and save the little they can for sale of distressed assets.

Locally, consultancy firm AnJarwalla & Khanna warned that Kenya will sooner than later see doors thrown wide to kick out companies that will fail due to effects of coronavirus and then, our few specialist will have a hot plate.

“The existing administration regime that allows business rescue under a formal process will not be appropriate during the Covid-19 pandemic for a number of reasons including that, there are only around 30 insolvency practitioners who could act as an administrator,” AnJarwalla & Khanna said in a proposed legislative memo to the government.

“Questions also arise on who will pay for the administrator during this process if there are insufficient funds in the business? How can the administrator manage the business as a going concern as the directors cannot act without his consent? Further, the purpose of administration is to give the administrator the room to rescue the business within 12 months and to give proposals to creditors within 60 days. We do not know how long the Covid-19 pandemic will last,” the legal firm said.

Coronavirus-related redundancies

These questions are yet to be answered because surprisingly Kenya has not seen a sustained spike of coronavirus-related redundancies, instead they have reduced.

According to the government official receiver Mark Gakuru since the pandemic hit the country in April, there has been on average two filings for liquidation in court every month.

This is down from nine cases in February and five in March just before the breakout.

This is because at the onset of the pandemic the Central Bank of Kenya (CBK) allowed banks to restructure loans from March 2, for three to 12 months from a mix of loan extension and moratorium on interest payments.

According to the CBK Monetary Policy Committee statement, lenders have restructured loans worth Sh844.4 billion which is a third of the total outstanding loan book of Sh2.9 trillion between March and June this year.

Out of this, Sh604 billion has been restructured to trade, real estate, manufacturing, transport and communication.

Courts registries have also been shut down or limited operations in line with government directives on social distancing, and stay at home orders, which has made it difficult to file insolvency cases.

“I have been talking to some bankers to assess the situation and they say most are holding out against filling since the courts have been closed or prefer talking to their clients and restructure their loans,” Mr Gakuru said.

A source at an insurance company that guarantees investment and credit risks for African business, also said banks are hesitant to classify loans as insolvent as opposed to restructuring and extending them because CBK allowed them to do so without attracting a capital charge and they risk getting a lower value if the businesses are declared bankrupt.

“They fear that if they file now for bankruptcy they will be forced to declare the value of the security they are holding, which under the current market circumstances will be greatly undervalued. So there is a higher degree of deferrals,” the source who did not want to be named due to company policy told Smart Business.

There is no doubt that the Covd-19 pandemic has caused or will cause most businesses to suffer a significant drop in revenue.

Under Kenya’s regime, companies are obliged to trigger an insolvency process if they cannot meet their obligations and creditors have the right to petition the courts to wind up a company that has not paid its debt from as little as Sh100,000 on the due date.

Kenya has had a bad history with insolvency which automatically meant that a company that struggled to pay debts could be dragged to court and shut down and assets sold for a song.

Iconic Kenatco taxis

Alternatively some firms were stuck perpetually in receivership such as the iconic Kenatco taxis, which has been in receivership since February 1996 after defaulting on National Bank and the Industrial and Commercial Development Corporation (ICDC) loans.

While in the old companies Act receivership was synonymous with liquidation creating the impression that receiver managers were undertakers coming to perform final rites on businesses, the 2015 Insolvency Act seeks to give failing firms a shot at survival.

Enacted in 2015 along the new Companies Act, the law was fashioned along British jurisprudence of promoting a rescue culture and removing the stigma of personal bankruptcy.  The law is meant to encourage businesses small and big to restructure their loans, arrange innovative debt to equity swap deals and at least, get breathing room to recover the business with the support of creditors.

Mr Gakuru said individuals and businesses should no longer look at insolvency as a terrible thing but an opportunity to adjust and survive.

For instance, one can apply for a summary instalment order so long as the debt is less than Sh0.5 million which will reduce payment pressures on debtors facing difficulties in meeting their obligations.

“This procedure is especially helpful during this period as the debtor is able to obtain reprieve for up to three years by paying instalments that he/she is able to during the said period. A debtor facing liquidity issues during this period may apply to the official receiver for this order to be issued in order for them to focus on rebuilding their business,” Mr Gakuru said.

Small-scale businesses can use the ‘no assets procedure’ options for debts between Sh100,000 to Sh4 million whereby most debts are not enforceable and upon discharge after a year, the debtor is released from the outstanding amounts.

To be admitted by the official receiver to the no asset procedure, a debtor should have no realisable assets, it should be their first time to invoke the clause and should not previously have been declared bankrupt.

The procedure is not as adverse and as long term as a bankruptcy order, but it has the same effects as one.

A debtor can also use the individual or company voluntary arrangement that allows them interim orders of stay on all action by creditors.

The debtor makes a proposal to creditors on how he would intend to offset his debt at a creditors’ meetings and once agreed amongst the debtors’ creditors, the said proposal becomes binding on the debtor.

A taxi belonging to Kenatco.

Photo credit: Salaton Njau | Nation Media Group

The viability of the proposal is determined by voting by creditors and when approved by majority of the, it is presented to court for adoption and is binding to all parties.

This allows the company to structure a repayment plan that will allow it to continue operating without creditors taking adverse action against them since during the period there is a moratorium/stay on all execution or recovery actions against the company.

Winding up suits

Uchumi, which was slapped with a winding up suits in 2016 and 2018 has managed to use the new Act very effectively to stay alive securing a voluntary arrangement in July this year to offset some debt, pay off part of the remainder in phases and write off a portion of payables.

Companies such as Athi River Mining and Nakumatt chose to go the administration way where they would be maintained for a period of one year, with a possibility of extension by court, or sold as a going concern so as to enhance value for the benefit of its creditors.

The debtor also has an option of going for bankruptcy which straight up declared he or she is unable to pay their debts and a bankruptcy trustee takes over the estate for purposes of collecting and paying creditors.

The bankruptcy period automatically lapses after three years and upon the lapse, the debtor is absolved of any personal liability for the debts specified in the order; if the discharge from bankruptcy is not opposed.

Creditors may also have tools of their own including triggering an administrative receivership in the case of a lender with a security created before the commencement of the Insolvency Act in 2015, to sell off or manage that security. The Administrative Receiver is tasked with the duty to realise enough of the company’s assets to pay the lender.

Creditors may also apply for liquidation where the management of the company’s affairs and control of its assets are taken out of its directors’ hands and vested in a liquidator.

The assets are then realised by the liquidator and debts are paid out of the proceeds of sale in order of priority and once the assets are sold and creditors paid, the liquidator closes the company.

As the CBK restructuring window closes, and reality of companies whose shutters will remain down become apparent, there is need to face up to the crisis before it hits the shores of understaffed emergency room of 20 insolvency practitioners.

AnJarwalla & Khanna says that given the number of defaulting businesses and to avoid a massive number of businesses being wound up, companies should be given breathing room to consider rescue and other measures to survive.

They propose that the government introduces a special procedure called a Covid-19 stay application giving it two months to come up with a recovery plan including relaxing rules of mergers and acquisition to secure a strategic investor.

During the moratorium the directors continue in office subject to reporting to a supervising administrator as they try and maintain the business as a going concern.

Within 14 days of expiry of the moratorium the supervising administrator would be required to file a report with the court confirming success or failure.

The court will, thereafter, make an order placing the company in Covid-19 administration or order for liquidation.