Economy

Insolvency Bill throws a lifeline to ailing firms

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Kenya Bankers Association chief executive Habil Olaka. Bankers say they were consulted on amendments to the new Insolvency Bill that seeks to offer distressed companies a ‘soft landing’ in debt recovery. PHOTO | FILE

Creditors owed money by underperforming firms will have to wait longer for their dues if legal changes proposed by the Treasury are passed by Parliament.

A new Insolvency Bill proposed by Treasury secretary Henry Rotich gives priority to revival of distressed firms rather than auctioning or liquidating them.

The Bill gives several alternatives such as rescheduling of debt to lengthen the repayment period instead of commencing bankruptcy proceedings in court.

Experts say the proposed changes – which generally seek to cut the power of creditors to dictate the terms of a settlement – are likely to hit bankers hard as they have been the main creditors in bankruptcy transactions.

“We were involved just like the private sector in coming up with the bill. One key issue is to give business a chance for revival rather than sell it straight away. The point is that the first option when someone cannot repay should not be to sell the assets,” said Kenya Bankers’ Association (KBA) chief executive Habil Olaka.

Mr Olaka said that there was also agreement among the parties to the discussion on the Bill that there should be a delay of sale of a bad debtor’s assets until all options are exhausted.

Instead of the position in the old law, where one could remain “bankrupt” forever, the proposed law says that a debtor will automatically be discharged from debt after three years.

“[The law] provides that a bankrupt is automatically discharged from bankruptcy three years after the commencement of the bankruptcy or may be discharged earlier on the application of the bankrupt,” says the Bill’s memo of objects and reasons.

This provision is, however, likely to spark off debate as others may see it as being lenient on people who choose to accumulate debts with the knowledge of being freed in just three years.

“The law was trying to look at the issue of discharge from the perspective of the debtor. The idea was that one should not be condemned for ever. Here the creditor is left holding the short end of the stick. But there is still time to discuss the Bill further,” said Mr Olaka.

An analyst in a commercial bank said creditors had for long had their way to the point that whenever a business is put under receivership, their first concern has always been to sell its assets rather than restructure it.

“The field was a bit skewed in favour of the bankers, but there is a sense that the Bill is putting some semblance of balance between the creditors and debtors,” said the analyst who declined to be named as he was not authorised to speak for his organisation.

Former Gem Joe Donde, who attempted to tame banks in late 1990s and early 2000s, said that banks should take restructuring of businesses seriously as the first option in case of receivership instead of focusing merely on selling assets.

“People who have been managing receiverships have looked at their role as just doing away with the company by selling its assets. It was a like a doctor believing you are already dead when you are brought to hospital and the only thing was to give you some painkiller as you await your death,” said Mr Donde,

He added that concerted efforts by the State and the private sector contributed to the revival of Uchumi Supermarkets and the same happened in the US when the government injected capital into failing banks and institutions following the global financial crisis in 2008.

Uchumi Supermarkets collapsed in mid-2006 and was immediately taken out of the Nairobi Securities Exchange, but was then revived in 2009 after the injection of new cash and conversion of debt into capital.

Corporate turnaround artist Jonathan Ciano was also appointed as the CEO and the institution has since become profitable.