In the span of a week, two Kenyan companies, Africa Spirits Limited (ASL) and East Africa Cables, have been put under administration.
TransCentury Limited (TCL), the parent of East Africa Cables, is under receivership as debt issues once again hit the operations of these previously thriving firms.
The Business Daily looks at what it means to go into administration and the next steps for companies after creditors seize their asset.
What is administration and how does it differ from receivership?
Administration is a process through which a third party, here known as the administrator, is appointed to run a company that has run into financial difficulties, with a view to restoring it to financial health or dispose assets so that it may be able to settle its dues to creditors.
The administrator, once appointed, takes full responsibility of all assets and undertakings oft the company. All other parties including directors, shareholders and employees are thereafter barred from taking any actions in relation to or on behalf of the company without the express authorisation of the administrator.
Receivership on the other hand is a more direct seizure of a company’s assets that are used as collateral for an unpaid loan by the creditor who holds the loan charge.
Unlike the administrator who acts in the interest of all creditors and seeks to revive a company as a first option, the receiver manager’s remit is to liquidate the charged assets to recover as much value as possible for their appointing credit.
The enactment of the Insolvency Act of 2015 introduced the concept of administration in Kenya.
Previously, the Companies Act only allowed for receivership as a means of recovering unpaid debt by corporate creditors.
Why are some companies still going under receivership even after the law change?
The reason some companies are still being put under receivership has to do with the terms of the loans as they were contracted. These loans that predate the 2015 Insolvency Act are resolved as per the terms when they were signed, which included asset seizure and receivership.
This is because under the transitional clauses of the Insolvency Act, creditors holding a floating charge (security interest over a company’s asset) that was created under the older rules of the Companies Act are exempted from the new rules when resolving the charge.
Receivership is still government under the repealed clauses of the Companies Act, and not under the Insolvency Act 2015.
How is the process of going under administration initiated and terminated?
Under the Insolvency Act 2015, a company can be put under administration via an order of a court, by a holder of a floating charge or voluntarily by its directors.
In the case of ASL, the company was put under administration by its directors after lengthy closure due to tax claims. For East African Cables, the administration action was initiated by Equity Bank over an unpaid loan of Sh1.95 billion.
An administrator’s term ends after 12 months from the date it took effect, but they have an option of applying to a court for an extension not exceeding six months.
The administration is usually terminated when the objectives are met, or via an application by a creditor who is not satisfied with an administrator’s actions. A court can also terminate it when the company is being liquidated in public interest.
What are the priorities of the administrators once they take over the company?
For an administrator, the primary goal is to return a company to financial health or a going concern, for the benefit of its creditors, owners, employees and other stakeholders.
In case such as revival is not possible, the objective would be the disposal of assets and distribution of the proceeds to the various creditors by priority.
These claimants by order include the taxman, senior debt holders, ordinary debt holders, employees (with a cap on payout amount) and finally shareholders.
Which Kenyan firms have gone into administration, and has any of them come out of it?
Since 2015, a number of prominent Kenyan firms have been put under administration, mostly through actions initiated by creditors.
In addition to the latest pair of East African Cables and ASL, others that have gone this route include Nakumatt Holdings, ARM Cement, Deacons East Africa, Tuskys Supermarket and Mastermind Tobacco.
Others are startups such as Sendy Group and Copia, and Vehicle and Equipment Leasing Limited (Vaell).
Aluminium products maker Kaluworks was put under administration in 2021, but later exited the arrangement after reaching an agreement with its creditors.
