Hard bump ahead? A jump in Kenya’s bankruptcies is a ticking time bomb

By Steve Umidha

A growing number of businesses in Kenya are operating on the edge, according to the swelling number of insolvency filings in gazette notices.

Since the beginning of the year, several companies have been forced to secure ad spaces in the local dailies to highlight their financial indebtedness – a worrying trend, blamed on the Coronavirus pandemic now spells doom to the country’s unstable workforce.

Companies such as Pine Care Limited, Xplico Insurance Company, and Olympia Capital Holdings among other reputable firms are warning their shareholders to expect ‘poor’ financial performance while others are giving notices of liquidation.

“Notice is hereby given that Ponangipalli Venkata Ramana Rao, has been appointed as the administrator of Pine Care Limited ‘under receivership’ effective the 16^th June 2021…the powers of directors in terms of dealing with the company’s assets ceased,” reads in part a gazette notice by the company.

Another firm, Xplico Insurance Company is fighting a petition of liquidation whose outcome will be known from July 14, 2021 in a High Court case filed in Malindi on May 18, 2021.

Xplico’s financial woes come on the back of the newly introduced risk-based capital requirements by the Insurance Regulatory Authority (IRA) – a new law that has seen most insurers struggle to comply with.

The company was found culpable of liability issues and customer complaints over delayed payments and disputes on the amount payable.

In light of the bleak financial reality faced by countless firms – including the above-mentioned companies, questions continue to arise as to whether Kenyan businesses can withstand the storm amid concerns of a fourth wave of the pandemic and lockdowns in some parts of the country.

Financial experts now fear that the Coronavirus crisis may continue to trigger a major acceleration in business insolvencies due to the historic size of the economic shock and its expected lasting effects.

These lasting effects have been critical for most companies that were already the most fragile before the crisis and are now among industries hit the hardest by measures to contain the pandemic including transportation and tourism sectors.

“Unless proper and long term measures including social protection policies to cushion both employees and distressed companies are put in place, I don’t see the trend changing, it is that simple,” says Sandeep Raichura, the Chief executive of Zamara Actuaries, Administrators & Consultants Limited.

Industry concerns

Estimates show that social and economic disruptions brought about by COVID-19 are projected to contract Kenya’s economy between 1 percent and 1.5 per cent this year.

According to the World Bank findings, it is projected that over two million more people in the country have fallen below the poverty line and around one-third of household-run businesses have not been operating as they once were before the pandemic hit.

Further, a study by BFA – a global research firm on COVID-19 indicates that more than 80 percent of Kenyan respondents reported a decline in income while 67 per cent reported an increase in expenses.

Predictably, the Central Bank of Kenya warned that 75 percent of businesses risk closure due to the lack of emergency funds and crisis in liquidity, a concern Mr Raichura says needs to be ‘fixed’.

“Lack of affordable credit has been the greatest challenge to these companies under financial hardships. It is one thing to have ‘affordable’ credit facilities and it is totally a different thing to have access to it,” argues Raichura.

His sentiments were shared by Peter Macharia – a financial expert who also blames the country’s rigid credit market for failure to cushion the ‘dying’ companies.

“There needs to be a solution – a long term remedy to bail out some of these struggling companies, most of which are sounding profit alarms,” said Macharia in an interview.

Insolvency proceeding in Kenya is liquidation and is conducted through Insolvency Act (No. 18 of 2015), which regulates insolvency records with regard to both natural and legal persons as well as unincorporated bodies.

Such processes are initiated voluntarily or through the courts. During the liquidation process, all the assets and liabilities of the company are identified as are all the creditors of the company for the purpose of realizing the assets of the company. Ordinarily, liquidation culminates in the winding up of the company.

The controversial ‘face’ of liquidation in Kenya

In the last evade for instance, the Kenyan corporate market has seen several companies opt for liquidation procedures.

Surprisingly one name has dominated the scene over the years, Ponangipalli Venkata Ramana Ra – a controversial corporate plunger who acts as a receiver manager for more than half of companies currently fighting liquidation challenges.

Companies ordinarily appoint an independent insolvency practitioner to act as a fiduciary for the company to realise the company’s assets and satisfy the outstanding debt of the creditor on whose behalf they have been appointed.

But disturbing statistics show that Mr. Rao has consistently taken advantage of the troubled companies to benefit materially from their woes.

In January 2021 for instance, the High Court Judge A court has ordered the receiver (Mr. Rao) of Athi River Steel Plant Limited, which is under receivership over a Sh7 billion debt, to respond to various letters sent by Credit Guarantee Insurance Corporation of Africa, which is owed excess of Sh456 million by the steel maker

However, the receiver denied failing to provide the information. He said he had requested the directors to provide a statement of affairs but he has not received the report.

Two weeks ago Mr Rao, also the Mumias Sugar Company Receiver Manager was taken to task by the Agriculture Senate Committee over claims that he sold scrap metal to Devki Steel Mills Limited, when he was then Kwale Sugar Factory receiver manager.

Rao is on record admitting selling scrap metal to Devki Steels Mills Limited while he was at Kwale Sugar Factory but denied having sold a commercial project to Devki.

The Committee probing the failed leasing bid by Devki also faulted Rao for failing to publicly advertise the leasing process of the troubled miller – the manufacturer eventually pulled out from the Sh5 Billion takeover deal.