Cytonn ruling a boost for rights of investors

The High Court’s decision ordering the liquidation of Cytonn’s assets to pay creditors is a welcome move that advances the rights of investors.

The Cytonn case was special because most of the investment products were not regulated, leaving investors to rely on the legal system to enforce their claims.

The company, through its plethora of subsidiaries and affiliates, collected more than Sh15 billion from the public and channelled most of the funds to real estate.

It then defaulted on both interest and principal, blaming the Covid-19 pandemic on the hard times that afflicted the property market.

The company later went into voluntary administration in October 2021 seeking more time to turn around its fortunes.

Fed up with the lack of progress on enforcement of their claims, a group of Cytonn investors went to court seeking to end the administration.

In its judgment, the High Court cut through the complex arguments and ruled that compensating investors whose funds were used to invest in the properties must now be a priority.

The court ordered the liquidation of the assets whose proceeds will be used to compensate investors.

Ruling otherwise would be to abate a fraud upon the creditors, the court said, adding that there would be no way to compensate creditors if the entities holding the properties are allowed to independently deal in the assets.

This decision is important because it affirms that investors’ rights cannot just disappear by the addition of extra corporate layers by what are essentially the same related promoters.

It emerged that there was legal and operational independence between the entities that collected funds from investors and the businesses that bought and held the properties.

Cytonn had argued that investors should limit their claims to the entities they were dealing with directly which are bankrupt.

The court however rejected this argument, saying that the investors are entitled to trace their funds into the real estate projects.