NAIROBI, (Xinhua) --
Kenya’s commercial law experts on Wednesday urged
troubled companies to consider re-organisations that could
include standstill arrangements and debt conversion into equity,
to help them stay afloat in a tough business environment.
MMC Africa Law
Corporate Commercial Law expert, Bernard Musyoka said players in
the financial, agricultural, manufacturing and fast moving
consumer goods sectors are the hardest hit with a huge reduction
in profits as recorded in their balance sheets published
“Most businesses are
sinking deeper into debt and face a risk of imminent shop
closure every day. This is unless a working turn-around strategy
can be implemented immediately,” Musyoka said in a statement
issued in Nairobi.
More than 10
publicly traded companies in Kenya have already issued profit
warnings in the last one year including the self-listed National
Securities Exchange (NSE), highlighting a tough business
environment that risks pushing most companies into liquidation.
“Nakumatt and Uchumi
(Kenya’s oldest retail chains) and Kenya Airways fall into this
category, and are currently rolling out measures aimed at
driving them back to profitability,” Musyoka said.
The expert has
advised creditors of companies facing turbulent times to
consider deployment of administration - a corporate insolvency
procedure by which a company can be re-organized or have its
assets realized for the benefit of its creditors.
retailer Deacons East Africa, underwriter Sanlam Kenya, Sameer
Africa, Sasini, Family Bank, CIC Insurance, Williamson Tea, Unga
Group Limited, Shelter Afrique, Limuru Tea are among the listed
companies that have already issued profit warnings in the last
“Unless the existing
shareholders are willing to pump more capital, such conversion
of debt into equity in favor of the creditor often results into
a dilution of existing shareholders,” Musyoka said.
Listed companies are
required by law to issue profit warnings if their profit for the
current year is going to be least 25 percent lower than the
profit for the previous year.
have not been spared either. Giant retail outlet, Nakumatt, is
currently struggling to stay afloat amid claims of unpaid rent,
salaries and suppliers.
Musyoka warned that
these companies risk falling in the jaws of creditors who often
result into using harsh methods that lead into liquidation and
push shareholders into losses and the employees into
“This is because
such liquidation will not be straight forward, it will likely
face resistance from the companies and it will take time for all
the creditors to agree how to share the pie,” argued Musyoka.
allows for the reorganization of a company or the realization of
its assets under the protection of a statutory moratorium, which
prevents creditors from taking action to enforce their claims
against the company during the administration process and so
hamper the implementation of a strategy for the company’s rescue
or asset realization.
Other key options at
the disposal of businesses caught up in such economic hardships
include standstill arrangements with creditors or debts
conversion into equity.
Under a standstill
arrangement, the debtor company gets a new leaf of life by
allowing it to trade and pay a nominated supervisor of such
scheme an agreed amount at agreed intervals, which can be
distributed to the on-hold creditors as agreed.
“This offers the
company protection during the still period and a second chance
to rectify the financial mistakes that led it into the red in
the first case,” said Musyoka.
Debt into equity
swaps on the other end is a capital reorganization of a company
in which a creditor converts indebtedness owed to it by a
company into one or more classes of that company’s share capital
which may not be equity share capital in the strict sense.
This lowers the
level of the debt of the debtor company, hence improving cash