Financial performance for the year ended June 2019 shows that liabilities payable within 12 months have outstripped current assets by 66 percent, from Sh6.14 billion the previous year.
The default status means that KCB can go after EAPCC’s property since the loan was secured by the company’s entire assets valued at Sh4.22 billion.
The audit revealed that EAPCC failed to remit pay-as-you-earn (Paye) tax of Sh376 million for the 12 months to June 30, 2019.
Cash-strapped East African Portland Cement Company (EAPCC) #ticker:PORT has sunk into a Sh10.2 billion insolvency after it defaulted on a long-term KCB Bank loan #tiker:KCB, forcing the lender to demand immediate repayment.
A report tabled in Parliament by Auditor-General Nancy Gathungu on the cement firm’s financial performance for the year ended June 2019 shows that liabilities payable within 12 months have outstripped current assets by 66 percent, from Sh6.14 billion the previous year.
“This movement was largely due to transfer of long-term loans to current liabilities on account of default on existing loan covenants,” Ms Gathungu said in the report.
A review of the report shows that EAPCC solvency took a big hit after KCB converted the entire Sh3.3 billion long-term loan into short-term, citing the cement-maker breaching terms such as interest payment and maintaining positive working capital.
“The group breached repayment covenant on KCB loan facilities. Consequently, the outstanding debt was classified as current liability as at 30 June 2019,” EAPCC disclosed in its annual report.
The debt default summed up a challenging year that saw EAPCC swing from a Sh7.85 billion net profit in 2018 to a Sh3.36 billion net loss—the worst in over 12 years.
The default status means that KCB can go after EAPCC’s property since the loan was secured by the company’s entire assets valued at Sh4.22 billion.
“The penalties on late repayment on all KCB loan facilities is charged at the rate of 10 percent per annum over and above the central bank rate plus four percent margin,” EAPCC disclosed.
The EAPCC debt that was classified as current as at end of June last year was Sh5.53 billion, a sharp jump from Sh1 billion the previous year.
Ms Gathungu said the EAPCC cement plant in Athi River continues to operate significantly below capacity due to working capital constraints, lack of essential spare parts and loss of market share to competitors.
“Due to the cash flow constraints, the company has been unable to settle the amounts due to its key suppliers and regulatory authorities including the Kenya Revenue Authority [KRA] and pensions liabilities,” Ms Gathungu said in an audit of the cement maker’s books of accounts.
The audit revealed that EAPCC failed to remit pay-as-you-earn (Paye) tax of Sh376 million for the 12 months to June 30, 2019.
“Cumulatively, the company holds a provision of Sh945 million of unremitted Paye and Sh496 million being penalties thereon,” Ms Gathungu said.
She said the cement maker had failed to remit value-added tax (VAT) totalling Sh221 million in principal and penalties and interest of Sh63 million to the KRA.
The report shows that the taxman carried out an audit on the company covering corporate tax, employees taxes, withholding tax and VAT for the period 2005 to 2008 and raised an assessment of Sh25 billion out of which Sh1.7 billion has been resolved.
EAPCC has also accrued Sh91 million in unremitted employee pension dating back to August 2018. This amount includes the principal amount, penalties and interest.
Further, the company had failed to pay Sh327 million in cement levy to the Mining ministry as at end of June 2019.
The Auditor-General also raised the red flag on the cement manufacturer’s failure to remit accrued dividends payable amounting to Sh102 million to the Unclaimed Financial Assets Authority (UFAA).
“Part of this amount has been outstanding for more than three years, exposing the company to increased penalties,” Ms Gathungu said.
In addition, the audit warns that the company has significant litigation against it which, if successful, may result in claims that are unlikely to be settled, given the entity’s current financial position.
“Details of significant claims include employee-related claims arising from unpaid salaries based on collective bargaining agreement (CBA) terms with an estimated total exposure of Sh1.7 billion, debt claims by suppliers for unpaid bills for services rendered or goods delivered totalling Sh411 million and claims arising from disputed deliveries, breach of distribution contracts and termination of supplier contracts totalling to Sh173 million,” the audit says.
Ms Gathungu said the liabilities accumulated by EAPCC are likely to undermine its status as “a going concern”—which means that a company's ability to make enough money to stay afloat or to avoid bankruptcy is in doubt.
EAPCC in September declared redundant all its 270 employees with an eye on trimming the company’s wage bill further. It said the move was aimed at cutting costs as outlined in the turnaround strategy adopted by the board and comply with regulations by the State Corporations Advisory Committee.
Last year, the Nairobi Securities Exchange-listed firm sent home 800 employees in a bid to reduce the firm’s bloated wage bill.
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