Troubled Nakumatt can be saved from the ‘Kiss of Death’ article by RLS Faculty C. Lichuma
The petitioner argues that Nakumatt has repeatedly failed to honour promises to pay its debts, leaving liquidation as the only viable way out. Thika Road Mall, through Moran Auctioneers, is also reported to have seized a number of Nakumatt’s assets seeking to recover Sh51 million in rent arrears.The question that arises is whether liquidation has become inevitable for Nakumatt or the existing insolvency regime offers some hope for this corporate citizen.Before the enactment of the Insolvency Act 2015, the statutory provisions regulating insolvency in Kenya were found in two different statutes — the Companies Act, Cap 486 of the Laws of Kenya and the Bankruptcy Act, Cap 53 of the Laws of Kenya. The tail end of the Companies Act outlined the procedure to be followed in the event of corporate insolvency while the Bankruptcy detailed the course of action to be followed in the event of personal insolvency or, as it is more commonly known, bankruptcy.
An individual found to be insolvent would be declared bankrupt by a court of competent jurisdiction and a corporate body would in most cases be wound up.The two regimes did not offer any alternatives to bankruptcy or winding-up proceedings. Insolvency of a company therefore meant that its “death” was imminent. It is for this reason that the insolvency laws in Kenya were for a long time referred to as the “Kiss of Death” laws.Insolvency is the inability of an individual or a company to pay debts. The Insolvency Act identifies two key tests that may be used to determine whether a company is insolvent. The cash flow test is set out in Section 384(1) (c). According to this law, a company is insolvent when it is unable to pay its debts as they fall due. The fact that the firm’s assets exceed its liabilities is irrelevant.
The courts, moreover, will take into account the firm’s actual conduct so that insolvency will be assumed if it is not in fact paying its debts as they fall due.The balance sheet test on the other hand is provided for under Section 384(2) and it considers whether the company’s assets are insufficient to discharge its liabilities, ‘taking into account its contingent and prospective liabilities’.This may involve assessing the value of assets and judging the amount the asset would raise in the market and then comparing this with the value of the company’s liabilities, a much broader term than debts.It is clear from Nakumatt’s failure to pay its debts that any court of competent jurisdiction would be hard pressed not to declare the company insolvent. However, under the Insolvency Act 2015 insolvency does not have to be a death sentence for struggling companies.One of the most innovative developments pioneered by the Act is Administration of an Insolvent Company under Part VIII. Pursuant to Section 522, the objectives of administration are to maintain the company as a going concern and to achieve a better outcome for the company’s creditors as a whole than would likely be the case if the company were liquidated.Whereas previously, a company could be wound up immediately it became insolvent, the Insolvency Act now offers an opportunity to operate as a going concern and not necessarily engage in the sale and realisation of its assets as a primary option. Under the Act, an insolvent company or its directors have the power to appoint an administrator. Section 558 of the Insolvency Act clearly states that if an administration order is confirmed by the court in respect of a company, an application for the liquidation of the company may not be made, and any application for liquidation that is already pending will be suspended for the period during which the company is under administration.
Unless the court has reason to grant an extension, administration proceedings can only last for a maximum of 12 months. During this period the administrator comes up with proposals on how to improve the financial well-being of the company and implements the proposals if they have been approved by key stakeholders. The key advantage of administration lies in the moratorium on other legal proceedings while the administration order is in effect.This means that before any legal rights can be exercised by creditors during a period when the company is in administration they must obtain consent from either the court, or from the administrator. If Nakumatt is able to go into administration it may be able to get the breathing room it so desperately needs to come up with a strategy that may allow it to come out of the miasma of financial woes it is currently languishing in.
Courtesy of the Business Daily