Why receivership is still a death knell for ailing firms

In Kenya’s corporate landscape, no firm has graced the corridors of justice more times than Uchumi Supermarket as it fights for elusive survival amid piling debts and other legal hurdles.

The country’s oldest retailer has for the longest time been in the doldrums and lived to tell the tale as one of the few firms that have dug themselves out of the grave that is receivership.

The retailer, having sunk back into insolvency in 2015, has fought a four-year nail-biting battle to stay above the din of drowning debts and creditors baying for its blood.

This is thanks to the 2015 Insolvency Act that gives businesses an opportunity at survival when it cannot pay its debts, keeping creditors at bay for a year.

“In the judicial world, receivership was referred to as the “death bed” and that was the understanding from the High Court to the Court of Appeal,” said Billy Kongere, a partner at MMC Africa Law.

Mr Kongere said the insolvency law was meant to address this problem. It was conceived in a way that creditors do not kill companies where they would allow it to continue to operate and be assured they will recover their money.

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.

Notable firms

Within this period, Chase Bank, Imperial Bank, Athi River Mining, Deacons, and Nakumatt were some of the other notable firms that had sought protection from the creditors but failed, raising fears that the change of law has not exorcised the ghosts of failing firms.

“It’s just been three years, so we cannot say the law has failed yet,” said Mark Gakuru, State Counsel in the Official Receiver’s Office of the Attorney General’s Chambers.

The State Counsel said in fact, there was no such thing as “receivership” as the phrase negatively denoted administration. One of the most important things the new law sought was to rid itself of that very word.

The old law used the words receivership and liquidation interchangeably, creating the impression that receiver managers were undertakers coming to perform final rituals on businesses about to breathe their last.

Section 236 titled the “Appointment and Style of Receivers/liquidators” says the official receiver shall by virtue of their office become the provisional liquidator and shall continue to act as such until another person becomes liquidator. However, many appreciate that while the law has changed, the players remain the same and whenever a firm announces it has gone into administration, it is quickly written off.

Deepak Dave of Riverside Capital, a risk management firm, said one of the biggest problems with resolution of Kenyan firms stuck in a debt quicksand, is time.

“Receivership in Kenya tends to come too late in the game. At an early enough stage, there would be enough time and transparency to achieve a turnaround. But by the time our companies file, it is out of desperation or because the dominant shareholder wants to cover for their final attempt to grab assets,” said Mr Dave.

In Nakumatt’s case, one creditor petitioned the court but a judge threw out the petition. One year later, however, the directors filed their own petition and the presiding judges ruled in their favour.

This makes it difficult to know why one request was allowed and the other was declined.

In the meanwhile, the firm continued to suffer stock-outs, landlords ejected the retailer from several outlets and by the time the firm was put in administration, it was already overwhelmed.

Mr Gakuru said administration takes too long since local courts are clogged up such that it takes on average of eight months to get one.

However, even then, there is always that one creditor who does not understand the significance of the process and seeks to stop it. During this time, the value of the company gets eroded.

Besides the lengthy time it takes to start the process, once firms goes into receivership, they are perpetually in limbo. 

“The longer it takes for receivership, the harder it will be for a company to come out of it,” said Mr Gakuru. The classic case of a receivership gone bad in Kenya is Kenatco Taxis Ltd.

The firm has been in receivership since February 1996 after defaulting on National Bank and the Industrial and Commercial Development Corporation (ICDC) loans, making it 22 years and counting.

But while that may be argued to be a consequence of the old law, Chase Bank and Imperial Bank have been in receivership for three years now and counting.

The Central Bank of Kenya (CBK) decided to hive off the good assets of Chase Bank and hand them over to the State Bank of Mauritius rather than save the lender. CBK is planning a similar move with Imperial Bank which will lose its good books to Kenya Commercial Bank.

Both will continue to exist on paper as failed lenders in receivership.

Analysts question why CBK was allowed to keep both lenders in administration for so long. Imperial Bank was put in receivership on October 13, 2015, which was extended a year later extended receivership by six months.

On March 24, 2017, the High Court extended the receivership by a further three months. The same would happen on June 19, 2017.

The lender was dealt another blow when the High Court extended the receivership by another 12 months on July 31, 2017, before slapping it with a further 70-day extension on July 31, last year.

On October 2, last year, another three-month extension was granted which was then extended a week ago.    

“It should not be so easy to get leave of court. For me, three years is very strange because receivership is supposed to be interim. you come in, sort out the mess and go,” said Mr Gakuru.

“An extension is usually six months, but this must be in circumstances that are out of your control. However, what we get is that they just make a miscellaneous application and get an extension with no reason whatsoever. It should not be that easy as courts should interrogate,” the State Counsel added.

The second biggest problem is the cost of receivership, including legal and administrative costs of re-organisation, paying legal fees and consultants as well as a limited ability to do business as relationships with suppliers and customers denigrate.

Studies have shown that if a company declares bankruptcy, clients tend to keep off, sending it to an early grave.

The cost is exacerbated because there are only 18 insolvency practitioners in the whole country, according to the Office of the Attorney General Business Registration Service and hence they charge top dollar for their services.

For instance, Peter Kahi and Atul Shah of consultancy firm PKF Kenya, who were appointed receiver managers of Deacons, will earn Sh35 million in fees from the failed clothes retailer.

Mr Kahi, who joined PKF East Africa in May 2015, has also bagged an administrator’s job with Nakumatt where, the firm which took over the failed retailer on January 22, 2018, charged Sh5.5 million in the first month, Sh3.5 million in the subsequent month and Sh2.5 million in March.

“The administrator has already been engaged for a fee of Sh21,500,000 (subject to VAT) The fee will be recovered from the company’s cash flows,” PKF said in documents.

For the remaining nine months, the firm will earn Sh9 million, plus legal and administrative costs.

Muniu Thoiti and George Weru of PriceWaterhouseCoopers charged Athi River Mining $650,000 (Sh65.6 million) for the first three months of their one-year mandate plus a fee of $78,845 (Sh7.9 million) for preparatory work ahead of taking over the company’s management.

PwC says it has deployed more than 20 professionals on a mostly full-time basis at the cement manufacturer’s various sites and locations.

KCB Group and NIC Bank also made significant sums from acting as receiver managers for Chase Bank and Imperial Bank.

The AG Official Receiver lamented that the fees paid are very high. “Ideally, the administrators are supposed to deduct their pay from the proceeds of what they have realised, but what we get is that they pay themselves first and not from work done. Most of the costs are exaggerated,” said Mr Gakuru.

“They (insolvency practitioners) still have a mindset of receivership. They need to have a mind shift to try and rescue the company rather than treat it as if it is already dead. Banks feel that paying someone Sh10 million to Sh15 million a month is quite high, increasing the cost of the receivership. They have a lot of portfolios that need restructuring, but they do not want to engage administrators.” Mr Kongere, however, said the new law has largely addressed the issue of overcharging.

He said, initially, the appointment of the highest ranked Certified Public Accountants (CPA’s) as receiver managers were due to their good reputation where they could charge per hour per person and these costs sometimes bleed the company to death.

This, he said, has changed. “The administrator has to be an officer of the court, he has to provide the state of the accounts and has to be transparent. They also have to fix their remuneration so that they do not just take 50 per cent of the income and give the other 50 per cent to creditors,” said Mr Kongere.

The new law also now allows a company to sit down and assess their processes and if they say they think at this stage they need a third eye to look at their processes, they can consult experts to look at their affairs and recommend receivership.

Alternatively, the creditors can put the company in receivership.

“This may open up the abuse you are talking about when they want to interfere, but the thinking is that the directors will take the information to the court to achieve the interest of the company. The courts have the power to appoint a different administrator,” said Mr Kongere.

But it is not a given, the creditors can still come to court, agree with the decision but recommend someone else.

He added that part of the new controls also included the fact that directors of the company have an opportunity to go to court and say that the administrati on is not doing what it ought to do.