This is a two-part series on the legal circus at Mumias Sugar Company. In case you missed it, read part 1 here .
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But mostly, it was also the fightback by KCB to have the Sarrai Group continue operating the sugar factory. The bid for Mumias had many anomalies that were laid bare in court.
“The bid documents did not disclose important information, including scoring criteria for the technical and financial bids, a reserve price below which the bids would become unresponsive, the debt portfolio of all secured lenders, the revenue that Mumias was generating at its lowest and optimum operation and above all, the value of the assets of Mumias which were the subject of the lease,” the court heard.
Justice Alfred Mabeya castigated the receiver manager, PV Rao, for being unprofessional and argued that “ it expected him to act as a professional insolvency practitioner, who would undertake his duties strictly in accordance with the statutory provisions regarding administration. This he failed to."
It is this failure that turned Mumias into a circus. The court also castigated Mr Rao for awarding the lease to the lowest bidder.
Uganda firm wins bid to lease Mumias Sugar
The court told Mr Rao that, while it directed him to proceed with the leasing process in strict compliance with the Competition Act, it did not expect him to undertake the duties of the Competition Authority of Kenya.
When challenged, Mr Rao did not explain how Mumias would pay off its debt to KCB and other creditors by relying on the lease amount being given by Sarrai Group.
According to Justice Mabeya, "the manner in which Mr Rao handled the leasing process did not tally with what was expected of him as an administrator….A simple calculation would show that, leasing Mumias at Sh5.8 billion for 20 years, [the company] would perpetually remain under receivership and administration. It would permanently remain an asset under KCB and be a retirement place for Mr Rao. The latter would superintend administration and receivership for 20 years and yet not be able to fully repay a single creditor. That won't do."
Both KCB and Mr Rao were found to have colluded to have Mumias as their asset – and for a long period. It is this dilemma that has persisted. The High Court also felt that Mumias rescue was in public interest.
“Public interest surpasses all the narrow egocentric interests of the creditors of Mumias. Public interest commands that Mumias survives and is rescued.”
And this is the issue that informs the appeal that KCB sought to engage in. Does public interest override creditors' interests?
After Justice Mabeya's ruling, Sarrai and KCB asked for a stay of Justice Mabeya's order. On April 25, 2022, Rakesh Bvats, a Sarrai Group director, sought a stay of execution and enforcement of Justice Mabeya's order made on April 14, 2022, and which appointed Kereto Marima of KR Consult Ltd as the administrator of Mumias Sugar Company Limited in place of Rao.
They also wanted a stay of the order that the lease given to Sarrai Group be cancelled and revoked. And that the receiver manager cooperates with the administrator and in default, the receivership shall stay suspended.
Uganda firm wins bid to lease Mumias Sugar
On June 6, 2022 three Court of Appeal judges, Asike-Makhandia, J Mohammed, and S ole Kantai, allowed the stay on the execution of Justice Mabeya’s orders pending the hearing of the appeal.
What did it mean? Did it mean that Mr Rao goes ahead with the receivership programme pending the filing of the appeal? Or did it mean stopping everything, including the handover of the leased property to Sarrai? Mr Rao interpreted the stay to mean handing over the property to Sarrai Group.
On June 29, 2022, Mr Rao sought a meeting with creditors and requested some Sh5 million per month to finance the administration budget.
Meanwhile, on July 22, 2022, one of the creditors filed an affidavit in court accusing Sarrai Group of asset stripping Mumias Sugar “in order to defeat the interests of all Mumias' creditors.”
In the affidavit, Ms Jackline Kimeto, a lawyer, accused Mr Rao of disposing of Mumias' company assets through lease. She argued that the stay order issued by Court of Appeal “did not amount to reinstatement of the lease or allowing Sarrai Group to vandalise or in any way deal with Mumias assets as a long-term tenant and/or owner.” She sought the interpretation of the High Court.
The lawyer further accused the receiver of taking “advantage of the ex-parte stay orders to vandalise” Mumias’ assets "whilst not even intending to file an appeal although the stay orders were applied for and issued pending their filing of an appeal."
The court was told that Sarrai Group did not have a duty of care to the body of creditors, the public, or any stakeholders.
"There seems to be no one supervising activities of (Sarrai Group) on the premises …further the creditors have no exact or precise knowledge of any listing or asset register of Mumias assets to vouch safe what assets belong to the company."
In her ruling, on the meaning of stay order, Justice W. Okwany ruled on July 28, 2022, that "an order for stay of execution cannot by any stretch of imagination be interpreted to mean that the orders of the High Court had been set aside… this court is of the considered view that stay orders are not equivalent to the setting aside or overturning of the orders of April 14, 2022."
The judge argued that Justice Mabeya's orders "are still in force, 'alive and kicking' until they are either set aside, varied or otherwise reviewed." The judge said the indebted advocates were justified in their apprehension of Sarrai's activities in Mumias when their lease had been cancelled by the court.
On July 29, 2022, the High Court ordered Sarrai Group to cease all activities, including the operation of the machinery, dismantling, vandalism, and removal of assets. It also ordered the police to facilitate the safe return of all vandalised and looted assets.
On August 1, 2022, Gakwamba Farmers, a membership organisation of various small and medium scale farmers, filed another application arguing that Justice Okwany's July 28, 2022 order had created "unwarranted confusion and conflict" by controverting two decisions by the Court of Appeal "both of which have preserved the legality and operation of lease over the factory, allowing it to resume operations, whereas the impugned decision cancels the lease, effectively stopping operations.”
On August 5, 2022, some indebted lawyers sued Sarrai Group for contempt of court. They sought to have the directors Sarbjit Rai, Rakesh Bvats and their advocates committed to civil jail for six months and Sarrai Group pay a fine of Sh100,000.
On September 23, 2022, the Court of Appeal ruled that the KCB receivers’ appeal was arguable on whether the court erred in sacrificing the interests of KCB as a secured creditor at the altar of public interest. They allowed the appeal to the "extent only that there will be stay of execution of Justice Mabeya’s ruling dated April 14, 2022."
While the Court of Appeal gave KCB time to file its appeal, it did not interpret what a stay meant. That had been done by Justice Okwany and her ruling was not appealed after Gakwamba withdrew their appeal on October 11, 2022. Pending those appeals, the battles between Sarrai and West Kenya continued.
