Huge debts choking efforts to revive distressed companies
About 22 companies were put under liquidation through direct appointment in the 2023-24 financial year, according to the Office of the Official Receiver.
Kenya’s financially distressed companies are grappling to secure a lifeline through ‘administration’ owing to their debts and late implementation of recovery measures, which pushed them into liquidation.
An administration process involves appointing an administrator to run a distressed company for one year with a possibility of extension by the court or selling it as a going concern to enhance its value for the benefit of its creditors.
Placing a firm under administration helps to regain control when it has serious cash flow problems, is insolvent, and faces threats from creditors. This helps to rescue the company as a going concern, achieve better results for creditors or control, and then sell off its property.
Data by the Office of the Official Receiver shows petitions for company liquidations are on the rise and have hit 30 since July 2023, highlighting the extent of financial distress facing businesses due to economic downturn and governance-related issues.
Administrators say keeping distressed companies as a going concern is becoming difficult because of debts that cannot be repaid within the ‘administration period’ of up to 18 months, citing the collapsed retail chain Nakumatt that went under with an estimated Sh38 billion worth of claims.
Liquidation (or winding up) is the process by which a company’s existence is terminated by selling its assets to pay off its debts. Any money remaining after all debts, expenses, and costs have been paid off is distributed among the company’s shareholders.
Since the introduction of the administration process in 2015, Nakumatt Holdings Ltd, ARM Cement Plc. and Deacons Plc were the first to go through the process, with hopes that their recovery would set a positive trend for other companies likely to undergo the same process.
However, these companies failed to survive the administration process, paving the way for their liquidation.
“These companies are heavily indebted. They can’t come out of that big hole. So, what we have been doing is trying to sell those assets to somebody who can buy them and put them to use because you find that by the time the company has gone that route, it can take them long to recover. I give an example of Nakumatt with Sh38 billion debt, which you can’t expect to recover. No bank will give you more money to pay that,” says Peter Kahi, a partner at PKF Consulting (K) Ltd.
“So we look at options. The first option is to see whether we can rescue that company, the second option is to try and maximise the returns for all creditors so that at least they get something, and if you can’t achieve the third option is to sell the assets to pay for preferential creditors and other claims. Most administrators have been going for option two or option three.”
The number of petitions for liquidation of companies presented to court has more than doubled in the last nine years. Even after the new Insolvency Act (2015) introduced a provision for an ‘administration process’ to give a chance to financially troubled firms to put their houses in order and revert to the recovery path.
Petitions for liquidations by the court rose to 30 in the 2023-24 fiscal year (July-June) from 13 petitions in the 2015-16 fiscal year (July-June), while the number of companies pushed into voluntary liquidation increased to nine from five in the same period.
About 22 companies were put under liquidation through direct appointment in the 2023-24 financial year, according to the Office of the Official Receiver.
“I can say these companies don’t go into liquidation but somebody else comes to make better use of their assets because if you continue running that company how many years will it take you to pay off Sh38 billion debt because the administrators’ period is 12 months with the first extension of maybe six months and that is what the law says,” says Mr Kahi.
Ken Gichinga, a Chief Economist at Mentoria Economics, says recovery of companies under administration requires a combination of administration and managerial expertise to be able tackle deal with problems related to the weak macroeconomic environment and the ‘trust deficit’ reputation crisis occasioned by the ‘receivership’ tag.
“Companies in receivership have to fight two battles which are a weak economic environment and the trust deficit battle associated with the high risk profile of companies in receivership. So you will find that the appointed administrators of these companies (in administration) end up fighting two battles instead of one battle and that is the reason it has been that hard to revive these companies,” says Mr Gichinga.
“ From the word ‘administrator, the administrators’ main concern is to keep the companies in administration as a ‘going concern’ but what these companies really need is almost a double level of management trend to be able to navigate this weak macroeconomic environment and to win the confidence of the customers. What we need is administrators working together with management gurus to revive these companies.”
Administrators say that normally they are called upon when companies are in the ‘intensive Care Unit (ICU)’ with nothing to salvage as most assets have been stripped by the directors. These companies are going through a crisis in which they cannot meet their debt obligations, salaries are in arrears, auctioneers are calling at the doors of the company, the tax man is calling and critical supplies such as electricity have been disconnected.
“There are three objectives of any administration. Reviving a company is the first and depends to a large extent on the state of the company at the point of the intervention,” George Weru, a Business Recovery Partner at PricewaterhouseCoopers (PwC) said in an earlier interview.
“If the intervention is too late when the distress is very significant this is not practical. The administrator proceeds to the next objective which is to sell the business as a going concern. This ensures continuity of the business and saves jobs which to me is still a success.”
Under the Insolvency law, a company is deemed unable to pay its debts if it fails to pay a debt of Sh100, 000 or more after 21 days of a written demand being served upon it.
According to a law firm Maina & Onsare Partners Advocates LLP the process of administration is intended to offer breathing space for insolvent companies while availing better returns and packages for creditors which are not ordinarily available in liquidation.
“It also gives Companies going through financial turmoil an opportunity to put their acts together. This allows them to continue operating instead of the earlier practice of abruptly killing them as was the case in the previous statutes (now repealed),” the law firm says on its website.
“It is an alternative rescue process which leads to a stay of past and future legal proceedings as envisaged by Section 560 & 561 of the Insolvency Act hence making it cheaper for the company.”
Up until 2015, a company in financial distress was met often with the liquidation culture triggered by voluntarily or by a creditor or subject to the court's supervision.
A company that was unable to pay its debts but did not want to ascribe to the liquidation culture had the option of either compromising with its creditors and/or undergoing reconstruction through amalgamation or merger with another company and the liabilities duly transferred.
