Learn from the West’s receivership laws, MPs told

As the government moves to review bankruptcy and receivership laws, it could borrow from developed countries like Britain and the US which have better structured laws on how to handle financially-troubled firms.

While in Kenya the terms bankruptcy, receivership and statutory administration are used interchangeably, in the two countries there is clear cut definition. President Mwai Kibaki during the opening of the current session of Parliament said that laws related to bankruptcy and receivership would be repealed.

Critics have argued that the laws, borrowed from British laws crafted in 1948, have not changed to reflect today’s business reality. They say that the laws did not anticipate financial distress due to temporary extraneous factors that a company had no control over, such as during the ‘90s when interest rates shot up due to the Goldenberg scandal that pumped paper money into the economy.

The critics also say current laws give creditors the leeway to liquidate companies that can be saved by proper management. The recent revival of Uchumi Supermarkets under a State rescue package, and that of Invesco Assurance Company through the injection of capital by Matatu Owners Association has emboldened those pushing for the review of receivership laws.

Others which have had a fresh start are Rivatex Ltd, which manufactures textiles after it was bought by Moi University. However, these rescuers, had either political muscle or certain rules were overlooked to enable them operate again.

“Under receivership management is important. We should not take it that a manager comes in and decides what to do with the organisation; there must be a meeting of minds of the stakeholders,” Mr Jonathan Ciano, who acted as receiver manager for Uchumi and took over as CEO, said shortly after the lifting of the receivership.

Different

In the UK, there are two categories of companies in financial distress. There are those that can not pay debts because there is no money in the bank; these can be liquidated unless they are rescued. Then there are those which have more liabilities than assets, normally termed as balance sheet insolvency, and are likely to avoid liquidation by negotiating with creditors.

In America, bankruptcy is governed by Chapter 11 which gives the company an opportunity to reorganise and fend-off liquidation. “Chapter 11 says you do not just place the financially troubled company into the hands of creditors.

This is because they are not interested in anything else but recovering their debts” Mr Ciano said. He said receivership should be approached in two ways. One is receivership that is there to strip down the firm because the objectives and strategies can not be amended.

The other is similar to the US Chapter 11, which is a turnaround situation where things that should have been done were not done, and the strategies and objectives were far from being achieved but the impact on society is great.
He gave the example of the Kenya Power and Lighting Company, in which he was hired in the past to restructure its finance. “Kenya Power should have been in receivership long before I was hired. But can you imagine Kenya without power?”