The Kenya Revenue Authority (KRA) has opposed a petition to voluntarily liquidate private equity firm ECP Kenya, arguing that the case filed by the former owner of popular restaurant chain Java House was meant to escape a tax liability of Sh3.3 billion.
The taxman reckons that the Kenyan arm of the US private equity firm ECP has not met the threshold for liquidation, arguing that it is bringing the firm to an end as a ploy to avoid settling the tax bill.
The KRA wants the court to vet and block the liquidation to protect the loss of the Sh3.3 billion.
ECP Kenya filed the insolvency petition last year, arguing that it was not trading and had not undertaken any business since April 15, 2023, and therefore, had no source of revenue, income or cash flow to sustain its existence.
The private equity firm sold its 90 percent stake in Java House in 2017 to another fund, Abraaj Group, for an undisclosed sum, and a year later, its parent firm revealed it had acquired a majority stake in restaurant chain Artcaffe Group.
The KRA is demanding Sh2.52 billion as corporation tax and another Sh773.8 million from the sale of Java.
It has petitioned the court to dismiss the case or make appropriate orders that will protect the collection of outstanding taxes due from the company.
Timothy Nthuku, a senior KRA official, said the firm had not attached audited financial statements since its inception to the time of applying for liquidation to show that indeed it had no assets or abilities to settle the outstanding taxes.
“That while the director has claimed that the company’s majority shareholder namely ECP Manager LP is undergoing liquidation in the United States of America, the director has not adduced any evidence in its petition to verify this fact,” Mr Nthuku said.
“It is imperative for this court to be satisfied that the company is genuinely deserving of a liquidation order and not abusing and using the court to avoid the outstanding liabilities.”
The case will be heard by High Court judge Josephine Mong’are on October 23.
The KRA official said the liquidation petition showed bad faith because ECP Kenya had pending tax disputes in court after losing at the tribunal and had sought an out-of-court settlement.
“That I believe to be true that the filing of the Liquidation Petition by ECP Kenya Limited’s director during the pendency of existing judgments for outstanding tax liability shows bad faith on the part of ECP Kenya Limited and is meant to defeat KRA’s efforts to collect the said taxes,” he said.
The firm’s director, Carol Margaret Campbell, stated in an affidavit that ECP Kenya had no funds to sustain an administration and the company cannot be maintained as a going concern.
Ms Campbell added that the company had no other debts other than the tax assessments by the KRA, which they have disputed. She further said the majority shareholder was undergoing liquidation in the USA.
The firm was involved in the collection of data from portfolio companies, processing and collating the data to respond to various tasks assigned to it by the parent company --ECP Manager LP.
“The company cannot be maintained as a going concern and there are no funds to sustain continued operations. It is therefore prudent to liquidate the company under section 425 (1) (a) of the Insolvency Act,” Ms Campbell said, asking the court to appoint the official receiver as the liquidator.
The decision, she said, was reached after a thorough evaluation of its financial standing and operational sustainability, and the company resolved to cease operations in Kenya, effective April 1, 2024.
She said the position was informed by the losses that the company incurred, as demonstrated by the audited accounts for the year ending December 31, 2023.
Court documents showed that the company posted losses totalling Sh3.3 billion, including the tax charges in the review period.
Ms Campbell said the company was unable to pay the debt or settle it via other means, maintaining that the firm was irredeemably insolvent for all intents and purposes.
In 2021, the KRA issued a corporate tax demand of Sh773 million against the company but the firm objected. The appeal was dismissed by the Tax Appeals Tribunal and a subsequent petition to the High Court was equally rejected.
The KRA issued another corporate tax demand on February 4, 2022 for Sh2.5 billion based on management fees received by ECP Kenya. The firm filed an objection and an appeal before the tribunal, but it was dismissed in November 2023. An appeal on the same is pending before the High Court.
Mr Nthuku said Ms Campbell was relying on minutes dated April 1, 2024 , which merely state that the firm had not engaged in trading activities, generated revenue or maintained cash flow, but had not annexed financial statements that would verify the lack of assets or revenue.
“That without prejudice to the foregoing, I am further advised by KRA’s Counsel on record, which advise I verily believe to be true that, if at all the company ceased doing business on 15th April 2023, at that point, the company was already aware of outstanding tax dispute with KRA that it ought to have made a contingency for,” Mr Nthuku said.
He added that there was no explanation by the firm as to why no contingencies were made with respect to outstanding tax liabilities that it was aware of, before ceasing business.
