Shoppers at a Nakumatt branch. FILE PHOTO | NMG
Summary
- African Cotton Industries Limited, one of Nakumatt’s top suppliers, has petitioned the court for a liquidation order against the retailer citing an unpaid debt of Sh70 million.
- 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.
In recent times the once rock-solid
Nakumatt Supermarkets has found itself teetering on the brink of
insolvency amid multiple legal and non-legal actions by irate creditors.
African Cotton Industries Limited, one of Nakumatt’s
top suppliers, has petitioned the court for a liquidation order against
the retailer citing an unpaid debt of Sh70 million.
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.
Lichuma is a lawyer and lecturer at Riara Law School.
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