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Wobbly firms find shelter in insolvency law

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Shoppers at a Nakumatt branch. FILE PHOTO | NMG 

More companies sought protection from the Insolvency Act 2015 this year as their operations crumbled amid a large debt pile-up, staving off liquidation that was previously triggered by default.

The firms that went into voluntary or forced administration are supermarket chain Nakumatt Holdings, liquefied petroleum gas (LPG) dealer Midland Energy, ARM Cement and fashion retailer Deacons East Africa.

They join early adopters of the insolvency law like construction firm Spencon Kenya Limited, which was placed under administration in 2017.

Administration is meant to maintain a company as a going concern besides ensuring better recovery for creditors as a whole than would likely be the case if the firm were liquidated without first going through administration.

The law empowers administrators to take various measures to rescue a company, with liquidation being the last resort. If a distressed company is sold or part of its assets liquidated, administrators will first distribute the proceeds to secured or preferential creditors.

The benefit of the law to unsecured creditors, in particular, was seen in the Nakumatt case where several suppliers applied to the courts to have the company placed under administration.

The suppliers, including Sunmatt Limited, feared that a liquidation of the retailer will leave them with a total loss since their claims are unsecured.

Sunmatt, for instance, is claiming some Sh335.9 million, followed by Primrose Management Limited (Sh142.4 million) and Compulynx Limited (Sh31.8 million).

“The applicants have expressed the view that if the company (Nakumatt) were to be liquidated, the creditors who were unsecured, would suffer a total loss,” reads part of the application to place the retailer under administration.

“On the other hand, the applicants believe that if the court were to grant an order for the administration of the company, that would give rise to the possibility that the company would be revived, thus giving hope to the creditors.”

Justice Fred Ochieng on January 22, 2018 agreed with the applicants and ordered that Mr Peter Kahi be appointed as the retailer’s administrator.

Nakumatt had accumulated debt of Sh40 billion while its total assets stood at Sh9.1 billion, indicating that its liquidation would have left suppliers and other creditors with a loss of Sh30.9 billion.

The retailer, which lost most of its stores in Kenya and the neighbouring countries, recently reopened its branch along Uhuru Highway. It now has seven stores.

Midland was the latest to be placed under administration in November after it became insolvent, with consultancy firm Ernst & Young (EY) now running the company on behalf of its creditors.

Deacons also went into voluntary administration of PKF Consulting in November after it was unable to pay its debt to suppliers and banks.

ARM’s creditors placed it under the administration of PricewaterhouseCoopers (PwC) in August.

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