Wobbly firms are increasingly finding shelter in insolvency law. But is this just a case of delayed burial rites?
Early adopters of the Insolvency Act 2015 such as construction firm Spencon Kenya Limited, which was placed under administration in 2017, do not look like they are coming back.
Nakumatt Holdings, Midland Energy, ARM Cement and Deacons East Africa, Mumias Sugar, Karuturi Multiple Hauliers and Phoenix Publishers have followed the same path and the list keeps bulging.
Britania Foods, the manufacturer of biscuits, has become the latest firm to be placed under administration after defaulting on loans of more than Sh1.3 billion.
More companies are seeking protection from insolvency law as their operations crumble amid a large debt pile-up.
An elite class of about 20 insolvency practitioners in the country are usually called upon when such companies go burst.
Mr Peter Kahi, a partner at PKF Consulting firm, has been at the centre of many of the firms’ quest for a second chance.
Companies such as Nakumatt, Deacons, Ukwala Supermarkets, Karuturi and Triton Petroleum have all been through his hands at their most troublesome periods.
In previous interviews, Mr Kahi said he classifies the challenges of firms in three stages: under-performance, distress and crisis.
“You come to me at that last stage, then my work will just be to prepare you for burial,” Mr Kahi once said. Unfortunately, many companies make that distress call at the ‘crisis’ stage, making it difficult for administrators to help.
Mr Kahi has spent as long as one year preparing some firms for burial and sometimes extending the period for final rites as creditors differ over how to split what is left behind.
The first priority of an administration is to restore the company. But the story often ends into liquidation, making the administrators seek to dispose of the company's property and distribute the proceeds to creditors.
Under the new Insolvency Act 2015, companies under financial distress have been using the legislation to ensure they remain a going concern as opposed to an outright liquidation.
The benefit of the law to unsecured creditors, in particular, was seen in the Nakumatt case where several suppliers applied to the courts to have the company placed under administration.
But for secured creditors, the process of rehabilitating companies in distress is one they have not been patient about given that it rarely brings these firms back to life.
“No one wants to run the risk of extending trade credit to a company that is already under administration,” IKM Advocates noted in a previous analysis on the insolvency law.
“Insolvent companies are also often dogged by the belief that the ‘rot’ inside the company is so widespread that it requires new ownership and new management to bring the company back to life.
”But banks for instance, are usually pushing for liquidation with the majority having interests as secured creditors.
LiquidationWhen a company is placed under administration, existing management paves the way for independent administrators who then try to kick-start the business with hope of saving investors from the loss that often comes with liquidation.
However, this means investors' fortunes are tied to the company for a longer period with no guarantee that the administrators will revive the business.
Administration and receivership have not yielded the best results for some of Kenya’s biggest firms in the recent past.
Retail chain Nakumatt, construction experts Spencon, flower firm Karuturi and cement maker ARM all went down after being placed under administration or receivership.
The downside of an administration, Oraro & Advocates company notes, is that it very often leads to the eventual liquidation of the company and it may not be possible to secure the sale of the business.
Further, it comes with negative publicity and exposes directors to claims in for misfeasance, fraudulent trading, wrongful trading, preferences, liability for transactions undertaken at an undervalue among others,” says the law firm.
The administrators are usually appointed for a period of 12 months but many times, this has been lengthened in efforts to resuscitate the companies.
Eventually, some firms have been disposed of for a song, leaving creditors in no better position.
