‘Kiss of death’ receivership laws to be reviewed, says State

The government will review receivership laws with the aim of reducing the number of companies that are driven to the graveyard by statutory managers. Experts say that the current laws provide leeway to entities owed money — whose chief concern is recovery of their loans — sometimes leading to the collapse of companies that could have been saved by proper management.

This review would have the effect of making the business environment better for local companies. Although Kenya has in recent years reduced the number of licences, experts say the legal system that deals with commercial disputes needs to be streamlined for speedy resolution.

“The laws on receivership and the Companies Act will be published and debated in Parliament. They are going to change the perspective of company law and how we do business,” said solicitor-general, Wanjuki Muchemi while at Uchumi Supermarket’s AGM on Friday.

“Most of the companies put under receivership do not see the light of the day (thereafter), they just die. The companies owed money do not care about anything else than recovering their debts,” Mr Muchemi said.

Under scrutiny

The receivership laws have always come under scrutiny whenever a company has been placed under receivership because of its inability to meet financial obligations. This was particularly evident in the 1990s and up to 2002 when interest rates increased exponentially, putting many businesses under distress with many being placed under receivership.

“I think it is a notorious fact of which judicial notice may be taken that receiverships in this country have tended to give the kiss of death to many a business,” said retired Justice Aaron Ringera, as quoted by LawAfrica, a publication that reviews judiciary matters.

Mr Ringera handled a case between Barclays Bank and Jambo Biscuits in 2002. The increase in number of companies placed under receivership, mainly due to sudden increase in interest rates fuelled by money pumped into the economy through the Goldenburg scandal, focused law experts on the receivership laws, and their need for review.

Experts say that the laws did not anticipate temporary strain on businesses sometimes because of extraneous conditions that the management had no control over. There have been complaints that many receiver managers have overstepped their mandate when executing the court orders. According to policy think tank, Institute of Economic Affairs, the laws governing receivership should be reviewed to enable the firms that can be pulled out of receivership survive.

Unsatisfactory

“The practice of insolvency in Kenya is far from satisfactory because Kenyans have noted that virtually all firms that go into receivership are eventually liquidated,” they say. They noted in a report in 2001, that current receivership laws were more favourable to secured creditors, while unsecured creditors lost out when a company was liquidated.

“The danger arises as debenture holders may appoint receiver managers who favour them over unsecured creditors,” they said. They said the law should be changed to remove preferential creditors, like as with government when a firm is liquidated.

They said it was important to consolidate the laws governing application for receivership to have an orderly process, that is understandable to the interested parties. The think tank said though the receivership laws were mainly anchored on the Companies Act, they were also tied up with other legislation, and unlike other laws were not arranged in a orderly way, making them puzzling to those involved.

By 2001 there were 6,687 applications for receivership involving co-operatives, at least 60,000 under the Companies Act, 55 cases under the Banking Act, four cases involving building societies and 38 involving insurance companies.