Liquidation: Huge debts choke efforts in reviving distressed Kenyan companies

Kenya’s financially distressed companies are grappling to secure a lifeline through administration, owing to their huge debts and late implementation of recovery measures, which have ended up pushing them into liquidation.

An administration process involves appointing an administrator to run a distressed firm for one year, with a possibility of extension by the court or sold as a going concern to enhance 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 facing serious threats from creditors. This helps to rescue the company, making it achieve better results for creditors or control, and then sell off its property.

Data by the Office of the Official Receiver, Kenya 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.

Read: Kenya facing a serious liquidity crisis, treasury saysAdministrators say keeping distressed companies is becoming difficult because of massive 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 Ksh38 billion ($292.6 million) 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 monies remaining after all debts, expenses, and costs have been paid off are distributed amongst 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.

But these companies failed to survive the administration process paving the way for their liquidation.“These companies are heavily indebted and they can’t come out of that big hole so what we have been basically doing is to try to sell those assets to somebody who can buy them and put them to better 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 Ksh38 billion ($292.6 million) debt, you can’t expect to recover that and no bank will give you more money to pay that,” says Peter Kahi, a partner at PKF Consulting (K) Ltd, a consultant firm in Nairobi.“So, basically, 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 that the third option is to sell the assets to pay for preferential creditors and other claims. Basically, 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 2023/2024 fiscal year, from 13 petitions in the 2015/2016 fiscal year while the number of companies pushed into voluntary liquidation increased to nine from five in the same period.

Some 22 companies were put under liquidation through direct appointment in the 2023/2024 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 ($292.6 million) debt because the administrators’ period is 12 months, with the first extension of maybe six months, that is what the law says,” Mr Kahi says.

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 deal with problems related to the weak macroeconomic environment and the ‘trust deficit’ reputation crisis occasioned by the “receivership” tag.

Read: Cross-listed firms hard-hit by drop in trade volumes“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 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 with nothing to salvage as most assets have been stripped by the directors.

These companies are going through a crisis; they cannot meet their debt obligations, salaries are in arrears, auctioneers are calling at the doors, the tax man is calling and critical supplies like 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 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 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. Provided by SyndiGate Media Inc. (Syndigate.info).