Bill gives lifeline to broke companies

Amos Kimunya. [Standard]

Shareholders of companies declared bankrupt by courts will have 30 days to salvage their businesses should a new Bill sail through.

The amendment of the Insolvency Act, 2015 is contained in the Business Laws (Amendment) Bill, 2020, which was introduced by National Assembly Majority Leader and MP for Kipipiri Amos Kimunya.

It also proposes to have receiver managers pay unsecured creditors at the same time with secured ones, in what is a score to suppliers who are always last in the pecking order when it comes to repayment.  

“The Bill proposes to amend the Insolvency Act, 2015 to clarify that an administrator can distribute routine payment to unsecured creditors without courts’ permission,” said Kimunya in the memorandum of objects and reasons.

“It also seeks to introduce a pre-insolvency moratorium period to prevent creditors from taking an enforcement action while a company considers its option for rescue.”

However, the proposed moratorium must have a reasonable prospect of achieving its aims. The company should also have sufficient funds available during the proposed moratorium to enable it to carry on its business.

Before the pre-insolvency moratorium comes into effect, there will be a document setting out why a moratorium is desirable.

This may include evidence that the moratorium “will assist in agreeing on an informal restructuring or other agreement with creditors or entering an informal insolvency restructuring or other agreement with creditors or entering a formal procedure which could lead to the rescue or efficient liquidation of the company.”

An authorised insolvency practitioner who has consented to supervise the moratorium shall be appointed as its monitor.

The Bill also allows a holder of a floating charge, unsecured credit, to apply to the court on the grounds that the effect of restricting payment to them would unfairly harm their interests.

The proposed law comes at a time when four banks were restrained from recovering Sh7.5 billion from a cash-strapped steel plant in Athi River, after a court rejected an argument by the receiver-manager they appointed that an unsecured creditor was not entitled to being furnished information by the receiver-manager.

Rao Ponangipalli, the receiver-manager appointed by Bank of Africa, Commercial Bank of Africa (now NCBA Bank), I&M Bank and KCB Bank had argued against providing information relating to financials of Athi River Steel Plant to Credit Guarantee Insurance Corporation, arguing that the latter was an unsecured creditor.

However, Justice David Majanja ruled that Mr Rao had a statutory duty to provide all information relating to a company under receivership to all creditors.

“A reading of section 723A of the Insolvency Act, 2015 is plain and obvious in so far as it imposes on the insolvency practitioner an unconditional obligation to provide information to a creditor, whether secured or unsecured,” said the judge.

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