Court petitions to liquidate defaulting firms double as economy worsens

Lenders intensified their efforts at recovering unpaid loans from defaulters with petitions for courts to dissolve defaulters doubling in the last 10 months to April compared to the whole of Financial Year 2022/23. FILE PHOTO | SHUTTERSTOCK

Lenders intensified their efforts at recovering unpaid loans from defaulters with petitions for courts to dissolve defaulters doubling in the last 10 months to April compared to the whole of Financial Year 2022/23.

Creditors petition for the courts to declare errant borrowers bankrupt rose to 10 in the period between July 2022 year to April this year, compared to the 12 months to June 2022, according to data from the State Receiver Office.

This reflects increased regulatory pressure for banks to bring down their non-performing loans (NPLs) which rose to 14.6 percent by April, the highest since June last year.

The bankruptcy orders by creditors, the highest since the Official Receiver started making these records public, is likely to increase once the numbers for the two months of May and June are included.

Read: How Cytonn snared investors in massive real estate losses

Banks might be forced to write off most of these debts, with recent cases showing that it has been difficult for receiver managers to revive these firms as the undertakers are called in when businesses are already in intensive care unit.

It is not just lenders that are seeking court’s intervention to unlock unpaid debts, other suppliers such as lawyers and contractors have also petitioned the court to liquidate defaulting businesses in order to recover their money.

The data shows that petitions for liquidation of companies by court were 33, a drop from 35 in Financial Year 2021/22.

Some notable companies that suppliers, investors, contractors want to dissolve, or courts have already ordered for their liquidations, include cement manufacturer Savannah Cement, the company that brought Kenya’s first ever electric taxi service EkoRent Africa Limited, Hashi Energy Limited, Peter Mulei and Sons Limited which owns the Mulleys Supermarket.

Others are insurance companies Explico Insurance Company, Invesco Assurance Company Limited, the Africa Merchant Assurance Company (Amaco), and Royal Swiss Bakery Limited.

Already, Savannah Cement, has been placed under administration following an application by ABSA Bank and KCB.

The cement manufacturer owes the two lenders Sh10 billion. The two lenders appointed Harveen Gadhoke as their administrator.

Keroche Breweries, which has had its own fair share of fights with the Kenya Revenue Authority (KRA), will be forced to fight off a petition by a law firm that has been defending it, to declare the Naivasha-based alcohol manufacturer insolvent over a debt of Sh233.7 million.

Hamilton Harrison & Mathews Advocates wants in a petition filed before the High Court the brewer to be liquidated under the Insolvency Act and an official receiver appointed as the provisional liquidator.

The High Court in January ordered the liquidation of investment projects owned by Cytonn Real Estate, allowing the sale of its properties in an effort to recover more than Sh14 billion the firm owes 4,000 investors.

Justice Alfred Mabeya also ordered the preservation of the company’s assets and housing projects identified as “the Alma, Applewood/Miotoni, Riverrun, Ridge and Taraji” until the liquidation is concluded.

The court noted that more than 3,000 members of the public sank in excess of Sh11 billion through Cytonn High Yield Solutions (CHYS) and 886 others invested more than Sh4 billion in the Cytonn Real Estate Project Notes (CPN), both of which the court has ordered for their liquidation.

“The court must be sensitive and alive to the plight of over 3,000 members of the public who sank their over Sh11 billion and 886 others whose over Sh4 billion was sunk into these projects and therefore lean towards a lesser evil, which is to preserve those assets for the time being,” he stated.

A tough economic environment has left individuals and businesses with little cash, with most of them of them finding it hard to service their loans.

As a result, NPLs, or loans that have not been serviced for more than 90 days, have risen reducing the profitability of most lenders who are forced to provision for the possibility of defaults.

Data from the CBK, the financial regulators, shows that the number of commercial banks in poor financial health in Kenya grew to 13 last year after more lenders failed to maintain the required capital levels that act as guardrails against a bank run.

The increase translates to a 44 percent rise compared to the nine lenders found to be in breach of critical supervisory and regulatory requirements in 2021, a new report by the Central Bank of Kenya (CBK) shows.

In total, the businesses that are at risk of having an appointment with the undertaker in the review period are 76, a drop from a record of 99 in the Financial Year 2021/22.

Read: Xplico Insurance faces wind-up suit

There were four companies under liquidation in the review period, down from 20 in the last financial year.

The damning statistics paint a grim picture of the country’s insolvency law that requires financially troubled firms to be given time to recover through an administration procedure, with liquidation being last resort.

→ [email protected]