EAST AFRICA: RESTRUCTURING QUARTERLY BULLETIN JUNE 2022
The Government has reinstated the wearing of masks in confined spaces in order to curb the spread of COVID-19. This comes after the President lifted the remaining COVID-19 restrictions in March 2022.
Kenya has not been spared from the far-reaching effects of the Russia-Ukraine war. The cost of food and oil have increased, there is a shortage of USD dollars which has negatively impacted the supply chain and (similar to other markets) stock prices on the Nairobi Securities Exchange have mostly declined.
Kenya is scheduled to hold presidential elections in August 2022. This notwithstanding, her GDP is expected to grow at a rate of 5.5%. It is anticipated that this growth will attract foreign investment which in turn will lead to further economic growth.
A number of companies have had to restructure or are undergoing insolvency processes in order to deal with their obligations to creditors. According to the Official Receiver’s office, the number of companies under administration jumped eightfold, from two in 2020 to 17 at the end of 2021.
The following companies have featured in the press over the last 6 months:
- Pearl Beach Hotels Limited (Pearl) – Pearl, a real estate firm, has been involved in a dispute with Kenya Commercial Bank Group over a KES 5.2 billion debt that the company owes the bank. The bank has sought to appoint a receiver manager over one of Pearl’s assets, English Point Marina, a luxury property located in Mombasa. Pearl has obtained temporary orders stopping the bank’s receiver manager’s appointment pending the determination of a suit filed at the High Court.
- SWVL Kenya Limited (SWVL) - In light of the global economic downturn, SWVL, the mass transit service provider, announced that it would pause two services, SWVL daily and SWVL travel, in Kenya. The company has indicated that its other product, SWVL Business which caters to private entities, organisations, and corporations will continue. The company also sent a letter to employees of its intentions to reduce the workforce. SWVL covered 300 routes to more than 55 destinations, offering direct rides to its customers. SWVL had partnered with more than 500 bus owners and directly employed about 100 employees in the country.
- ARM Cement PLC (ARM) – ARM was placed into administration in August 2018. Creditors of ARM opted to sell the company’s assets to settle dues. Preferential creditors received a full settlement of approximately KES 326.6 million. Secured creditors recovered approximately KES 4.98 billion out of a total claim of approximately KES 8.03 billion. Unsecured creditors only received 6.2% of the KES 9 billion amount claimed.
- Countryside Dairy (Countryside) – Countryside has been placed under the administration of the Official Receiver. There are approximately 20,000 farmers that supply milk to the company. Creditors have been requested to prove their debts to the administrator.
- Centum Investment Company (Centum) – Centum’s subsidiary, Two Rivers Development Limited, plans to sell a stake in its business in order to raise new capital and cut debt. The purpose of this sale, amongst other things, is to retire some of the debt held by Two Rivers Development Limited and is among several transactions Centum has lined up to raise cash.
- National Oil Corporation of Kenya (NOCK) – NOCK is pursuing a bailout for KES 13 billion from the National Treasury to pay bank loans and meet operating costs. KES 6.6 billion is owed to various banks for the extension of credit to this State Corporation.
- Resolution Insurance Limited (Resolution) – Resolution has been taken over by the Policyholders Compensation Fund as the statutory manager, after the company’s failure to recapitalize the business. The total value of compensation to policyholders will be capped at KES 250,000 for each client. Creditors and policyholders with higher value claims will have to wait for the liquidation of the business in order to gauge how much more can be recovered. Resolution is the first underwriter to be put under statutory management since the collapse of Concord Insurance in 2013.
- Cape Holdings Limited (Cape) - Cape, which owns the ‘14 Riverside Drive Complex’ was placed into administration by its secured creditor, I&M Bank Limited. Cape was locked in a court case against Synergy Industrial Credit Limited (Synergy), which is seeking to recover a debt of KES 5.5 billion. Synergy applied to the High Court of Kenya for an order permitting it to auction 14 Riverside Drive in order to recoup its debt. The order was granted and the auction was scheduled for January 2022. However, I&M Bank filed an appeal to prevent the auction from taking place. The Court of Appeal has since put the planned auction on hold.
Interesting developments in case law
High Court Insolvency Petition E018 of 2020 - Tusker Mattresses Limited v Equity Bank Kenya Limited & another 
Tusker Mattresses Limited (the Company) sought a temporary injunction pending the hearing and determination of its ongoing insolvency proceedings. The Company sought to restrain Equity Bank Kenya Limited (Equity) from exercising its statutory power of sale over the Company’s premises in Nairobi’s Central Business District, which it had charged to Equity to secure certain facilities.
In November 2021 (the Order), the High Court put in place a moratorium staying any and all legal proceedings against the Company. However, Equity proceeded to instruct an auctioneer to sell the suit property. The High Court was asked to determine whether the sale of the suit property went against the moratorium imposed by the Court.
The Court held that the Order did not apply to Equity’s exercise of its statutory power of sale. It was not convinced that the exercise of a statutory power of sale conferred by security documents constituted a legal proceeding. The Court relied on the decision in East Africa Cables PLC v Ecobank Kenya Limited  eKLR where it was held that a secured creditor is entitled to exercise its rights under a security document or statute in the event of default by a company and that this power is not subject to insolvency proceedings commenced against a company by any other creditors.
In the matter of Zarara Oil & Gas Company Limited  KEHC 191 (KLR)
The applicant was a liquidator and a foreign representative of Zarara Oil and Gas Limited (the Company) and made an application that sought to recognize the decree of the Mauritian Courts in relation to the company’s liquidation proceedings commenced in the Republic of Mauritius. The creditors opposed the application on grounds that the applicant had not attached a list of creditors or any financial statements to show that the company was in financial distress. The Kenya Revenue Authority (KRA) opposed the application on grounds that KRA should have priority to tax the company for any tax arrears before the company engages in paying back its creditors.
The High Court held that the Insolvency Act did not impose on an applicant the duty to list all creditors or provide financial statements to prove that a company was in financial distress. The fact that insolvency proceedings had commenced in a foreign country was prima facie proof that the company was in financial distress. Further, the issue of disclosure could be dealt with when considering the relief, which the court could grant.
The court held that treating KRA as a priority creditor by virtue of section 34 of the Tax Procedures Act and any argument that KRA should be paid the taxes owed before any other creditor was paid would undermine the basic principle underlying insolvency. All creditors of the same class had to be treated fairly and equally. Such a position would amount to the court taking over the insolvency proceedings, contrary to the Insolvency Act, and undermine the other creditors. Even though section 34 of the Tax Procedures Act provided for priority of taxes, the issue of payment could only arise once the liquidator realises the assets and proposes to pay the creditors. The objection by KRA to the recognition on that ground was therefore dismissed.
The court recognized the foreign insolvency proceedings and imposed a stay on all proceedings, barred commencement of any suit and transfer of assets relating to the Company pending finalization of the liquidation process. The court authorized the Supreme Court of Mauritius (Bankruptcy Division) to adopt such process that gives the Kenyan creditors meaningful and affordable access (including virtual access) and participation in the insolvency proceedings. The liquidator was also required to file in the High Court of Kenya and serve the creditors and or their representatives in Kenya periodical reports of the proceedings in Mauritius and the status of the insolvency every 30 days.
Capital Markets Enforcement Decision Against Official of National Bank of Kenya
The Capital Markets Authority has barred a former chief financial officer of the National Bank of Kenya from holding office in a listed entity for 10 years and fined the officer KES 1 million. The Business Daily reported that the High Court case challenging the Capital Markets Authority’s decision was dismissed after the court held that the Authority had jurisdiction and granted the officer a fair hearing. The High Court decision has not yet been published.
Challenges facing the insolvency landscape
We have noted the following key challenges in undertaking insolvency processes:
- Delay Tactics by debtors: this is where a debtor obtains court injunctions and withholds information to stall the insolvency process as they strip a company of its assets - while litigation drags on in court. Stripping an insolvent company of its assets is an offence under the Insolvency Act.
- Prolonged management of failed businesses: In the past, it was not uncommon for receiver managers to take many years to manage failed businesses while being paid large sums. In order to restrict this practice in administration, there is a proposal that the Official Receiver will be required to recommend whether courts grant approval to extend the term of administration after 12 months. The administrators will have to explain what they have done till that date, how much they have realized, as well as justify their pay.
- Delays in finding a suitable buyer: Insolvent companies are perceived as a high-risk investment not least because of the limited contractual protection offered by insolvency practitioners. In some cases, it has taken years to find a buyer who is willing to acquire the business of an insolvent company. It could be that by the time the company is being put up for sale, it is mainly a shell because a formal rescue process was not commenced when it was most needed and would have had the most impact. We have not seen a huge uptake in distressed debt funds acquiring insolvent businesses in the Kenyan market.
It had been hoped that the easing of COVID-19 restrictions and the full opening of the economy would allow businesses to thrive once again, which would in turn revitalize the economy, but this has not exactly been the case. The Russia- Ukraine conflict has strained supply chains and caused a shortage of fuel/ energy, food and inputs. This has caused a dramatic spike in fuel and food prices, as well as the prices of essentials. This together with the weakening of the Uganda shilling against the US Dollar, according to the Central Bank, has worsened the inflation outlook. The Central Bank expects inflation to keep going up. Accordingly, the Central Bank on 2 June 2022 raised the Central Bank Rate to 7.5% and placed the rediscount and bank rates at 10.5% and 11.5% respectively. The Central Bank also indicated that it will continue to raise the CBR until inflation is contained around the medium-term target.
The Central Bank has indicated that it intends to phase out the remaining targeted credit relief measures for the education and hospitality sectors on 30 September 2022. Further, the COVID-19 Liquidity Assistance Program for managing potential liquidity risks arising from the pandemic, as well as the restriction on payment of dividends and other discretionary distributions on Supervised Financial Institutions, expired on 31 May 2022. The World Bank also projects that few countries will survive recession in the coming months. Accordingly, it is feared that many individuals and businesses will fail to meet their obligations. It is expected that several businesses will either go into financial distress and/or seek restructuring of their facilities.
Simba Group Debt
The Simba Group (a leading local set of Companies trading in the hotel, real estate, telecom and energy sector) has recently come under the spotlight after one of its creditors, Vantage Mezzanine Fund II Partnership (”Vantage”), a South African based fund manager, advertised its properties for sale for failure to meet debt obligations. Vantage claims that in 2014 it extended a Mezzanine loan facility to Simba Group of USD 10 million that Simba has failed to repay. Vantage claims the loan has since grown to USD 32 million due to accumulated interest. The Simba Group Chairman last week released a public statement where he acknowledged the debt but said difficulties arising from delays in Uganda’s oil and gas sector had undermined the Group’s ability to repay the loan. The matter has led to a litany of court filings that have formed part of the legal, financial and social discourse in Uganda. The matter has also drawn the attention of the Central Bank, which has written to Vantage’s lawyers seeking further information and explaining that ‘the potential market valuation of the listed properties for sale and their commonality in ownership, together with its own market intelligence, make it highly probable that the Group is a systemic borrower within the financial sector’. If the Central Bank’s assessment is correct and the Group fails to settle its debt, the Simba Group may fall into financial distress.
The impact of the COVID -19 pandemic on the Tanzanian economy is clearly seen. The business landscape has become much more precarious because of the protracted uncertainty as a result of the COVID- 19 pandemic. For instance, the hospitality industry was directly affected despite the country not implementing lockdown measures and travel restrictions. However, we see that the economy’s growth is set to accelerate this year, as large infrastructure projects bolster employment levels and domestic demand in turn.
We have identified the following trends in relation to restructuring, insolvency and dispute resolution in Tanzania:
- The Government is still taking measures to lessen the impact of the pandemic on economic activities and promote growth. Recently, the minimum wage was increased by nearly 25% and a USD 43 million fuel subsidy was given to help mitigate the impact of higher living costs and lessen the impact of the pandemic.
- M&A is still the preferred exit route from financial distress in Tanzania. According to the Fair Competition Commission, from January 2022 to April 2022, there has been an increase in M&A activity as 12 M&A deals have been listed. We expect to see more M&A transactions in different sectors such as banking, insurance, mining and hospitality industries.
- We also note that there is more corporate debt restructuring. Companies accumulated a lot of debt because of the COVID-19 pandemic. In 2021, various companies converted that debt into equity for lenders and investors - a trend that will likely continue throughout 2022.
- We also observe that creditors and lenders are enforcing their rights by way of winding up petitions where there is no or insufficient security. Banks and financial institutions appear less willing to wait to see whether the borrower’s situation will change.
As the Mauritius economy picks itself up in the aftermath of the pandemic and the de-listing of Mauritius from the grey list of the Financial Action Task Force and the blacklist of the European Union, the Government has wasted no time in continuing with its policy of ensuring growth in its financial services sector through the introduction of the two pieces of legislation pertaining to virtual assets and initial token offerings as well as the variable capital structure. This was done through the enactment of the Virtual Asset and Initial Token Offering Services Act 2021 (VAITOS) and the Variable Capital Company Act 2022 (VCCA). These have in turn brought about a different dynamic to the insolvency laws of Mauritius.
VAITOS falls under the purview of the Financial Services Commission (FSC) which regulates and supervises the virtual asset providers (VA) and the issuers of the initial token offerings (ITO) operating in Mauritius. VA provides are required to be licensed whilst issuers need to be registered with the FSC - both are subjected to various obligations including but not limited to share transfers, organization of legal structures and compliance with various data protection laws.
The coming into force of VAITOS impacted on the legislative framework surrounding financial services, securities transactions and, inevitably, the insolvency regime. Instances of changes in insolvency laws include the addition of VAITOS to the other legislations, such as the Financial Services Act 2007 or the Securities Act 2005, whereby entities may be subject to a petition for winding up in the event a licensee of the FSC has carried out business in Mauritius in contravention of the aforesaid Acts. Other instances relate to winding up proceedings being initiated upon the revocation by the FSC of the licence of a provider or issuer. Further, where a licence or registration, as the case may be, has been suspended, revoked or surrendered, or where the FSC considers that the conditions of a licence or registration are no longer met by the VA or ITO, the FSC may appoint an administrator to take over the management of the business of the VA/ITO.
The VCC is a new offering for different types of investment schemes in Mauritius. It is, in essence, a specialist fund scheme with an array of activities spread out in investment portfolios. Each portfolio is segmented through sub-funds (SFs) and special purpose vehicles (SPVs) with its assets and liabilities being segregated and ring-fenced. For a company to operate as a VCC, it should first be registered/incorporated with the Registrar of Companies and subsequently seek authorization with the FSC to operate as a VCC. In addition, approval would have to be sought with the FSC for the operation of each SF or SPV as a collective investment scheme or closed-end fund.
Segregation of assets
The assets of a SF or SPV cannot be used to discharge the liability of the VCC (or any of the other SF or SPV of that VCC), including during the winding up, administration, or receivership of any other SF or SPV of that VCC.
Every asset attributable to a SF or SPV is available only to the creditors of the company who are in fact creditors in respect of that SF or SPV specifically and are otherwise protected (subject to compliance with the Income Tax Act) from the creditors of the company, another SF or SPV, including claims from any statutory, regulatory or Government body.
A novel feature that the legal framework around VCCs brought about is its winding up process. Where a VCC initiates a voluntary winding up in respect of a SF or a SPV, regardless of whether it has elected to have separate legal personality, it is mandatory to obtain the approval of the FSC in accordance with a plan for the winding up. The FSC will have to be satisfied that the interests of the participants in the SF or SPV are properly protected. However, no such consent is required where the application is lodged before the Bankruptcy Division of the Supreme Court to wind up a SF or SPV. This is provided that the Court is satisfied that (i) the SF or SPV is operating in contravention of the VCCA, any FSC Rule or its constitutive documents; or (ii) the winding up is necessary to protect the interests of investors in, or creditors of, the SF or SPV; or it is just and equitable to make the order.
The differentiating factor lies in whether the SF or SPV elects to have separate legal personality - where the FSC approves the voluntary winding up of a SF or SPV that has legal personality separate from its VCC, the provisions of the Insolvency Act relating to voluntary winding-up shall apply with such adaptations and modifications as may be necessary. In short, the winding-up of a SF or SPV will not automatically trigger the winding-up of the VCC – it will carry on its business as an incorporated entity under Mauritius laws operating within the framework established primarily by the VCCA but also be subject to the relevant provisions of the Companies Act 2001 and the Insolvency Act 2009.
It has been reported that in the first quarter of 2022, on average, bankruptcy declarations slightly decreased by 0.8% in the EU compared with the fourth quarter of 2021. The bankruptcy declarations in the first quarter of 2022 were considerably below the levels pre-COVID. Countries like Portugal and Romania have had one of the largest decreases (18% and 27.5%, respectively) in bankruptcy declarations during this period whereas, France has had one of the highest increases (17.6%) over the same period.
- It has been reported that there will be an increase in the number of distressed companies in the UK in 2022 because of rising inflation. The Bank of England has warned that inflation could reach 10%. Even though businesses in the UK were heavily supported by the Government at the onset of COVID-19, the numbers of distressed companies have started to rise as repayment of loans granted during the pandemic fall due.
- Companies like Misguided, an online fashion retailer, House by Urban Splash, a real estate company and TM Lewin, an online men’s sportswear retailer, have been placed into administration this year.
- The Commercial Rent (Coronavirus) Act 2022 entered into force on 24 March 2022. The purpose of the law is to provide relief to tenants from payment of certain rent debts under business tenancies adversely affected by COVID-19. The period of protection under the Act is from 21 March 2020 until the last day on which the business was subject to either a closure requirement or a specific coronavirus restriction stipulated by the Government. The types of relief available to tenants include writing off, giving time to the tenant to pay, and reducing (including to zero) any interest otherwise payable by the tenant. If the landlord and tenant cannot agree on a suitable arrangement, the matter can be referred to the arbitration regime created under the Act.
- Section 2 and 3 of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 entered into force in February 2022. Various sections of the law have come into force at different times. These provisions allow the Insolvency Service to investigate the conduct of directors of a dissolved company without having to restore the company to the register. Where a director’s conduct is found to be unfit, the director can be disqualified for between 2 -15 years and may be liable to pay compensation if the director’s actions caused a loss to the company’s creditors.
Case law updates
Re Changtel Solutions UK Ltd (in liquidation)  EWHC 694 (Ch)
- Changtel Solutions UK Ltd (in liquidation) (Changtel UK) made an application to recover various sums of money that the company had paid to persons during the period between the date of filing of the winding up petition and the date of making of the winding up order by the court. This case addressed five payments of £47,053.28 made to G4S Solutions (UK) Limited (G4S UK).
- Section 127(1) of the UK Insolvency Act provides that any disposition of a company's property made after the commencement of winding up is, unless the court otherwise orders, void. The issues for determination were:
- whether a cheque payment provided to G4S UK 7 days before the petition was presented but which was only cleared 4 days after the petition was presented could be considered under section 127; and
- whether the payments to G4S UK should be validated by the court.
- The court held that the end result, the point of ultimate receipt of company property, was the most important aspect of insolvency. The court’s view was informed by the reality that a creditor who holds an uncashed cheque and a creditor with a money judgment are in similar positions for insolvency purposes. Disposition of the company property was held to be the debiting of the Changtel UK’s bank account rather than the presentation of the cheque to G4S UK.
BTI 2014 LLC v Sequana SA and others (UKSC 2019/0046),
- In 1990, BAT Industries plc (BAT) merged Wiggins Teape Appleton plc, a holding company of Appleton Papers Inc (API), with a French paper manufacturer, changing the name of the merged entity to Arjo Wiggins Appleton Limited (AWA). The paper businesses were sued in various claims alleging environmental pollution, and the companies, including BAT and API agreed to share liabilities for the claims. In 2000, Sequana SA (Sequana) acquired AWA with API being sold to an employee buy-out company the following year. As part of the sale, AWA agreed to indemnify API against liabilities relating to the environmental pollution claims.
- AWA ceased to be a trading company in 2001 and lent its assets and receipts to Sequana, resulting in the accumulation of a EUR 585 million debt to Sequana. In 2008 and 2009, the directors of AWA approved payments of two dividends of EUR 578 million to Sequana to reduce the debt. BTI 2014 LLC, an investment vehicle set up by BAT (a potential creditor of AWA), sued Sequana and AWA directors, alleging that the payment of dividends was (i) not lawful as the company did not have distributable profits; (ii) a breach of the duty of directors of AWA to consider interests of creditors; (iii) a transaction intended to defraud creditors.
- The Court of Appeal affirmed that the common law duty on directors (to consider the interests of creditors) arises before actual insolvency, when the directors know or should know that insolvency is likely. In this case, the duty to creditors was not engaged because there was no evidence that AWA was insolvent or likely to become insolvent. BTI 2014 LLC appealed to the Supreme Court, which was asked to consider whether the duty on directors to consider the interests of creditors arises when there is a real risk of, as opposed to a probability of or close proximity to, insolvency. The Supreme Court has already heard the matter but is yet to publish its judgment.
- The United States has been faced with rising interest rates with the Federal Reserve raising short-term rates. The rising interest rates make loans more expensive for businesses, which may result in entities that are unable to afford or unwilling to make higher interest payments postponing projects that involve financing
- The total number of corporate bankruptcy filings in the United States reduced to 115 in the first quarter of 2022 compared to 175 over the same period in 2021. This is consistent with S&P Global’s January report that corporate bankruptcies this year are expected to remain low because companies are still being kept afloat by federal stimulus funds. Also, private lenders still appreciate that businesses are coping with uncertainty and are likely to give businesses room to recover. Examples of companies that have filed for bankruptcy include Escada America (a women’s fashion retailer) and Zosana Pharma (a pharmaceutical company).
- AMC Entertainment Holdings Inc., the world’s largest movie theater operator, sold a $950 million bond. The company escaped bankruptcy in 2021 after receiving $917 million from investors. The company’s operations have been strained by the COVID-19 pandemic restrictions, with the share price dropping to as low as $1.98.
- Evergrande, which is based in China, is the world’s most indebted property developer with liabilities of more than USD 300 billion. Reuters has reported that the company expects to announce its preliminary restructuring plan before the end of July 2022. The firm, which has USD 22.7 billion worth of offshore bond debt, is deemed to be in default after missing interest payment obligations of USD 1.2 billion in December 2021. The company has also struggled to repay suppliers and other creditors and complete projects and homes. In a stock exchange filing made on 20 June 2022, Evergrande also said it does not have a timeline for publishing its 2021 annual results or completing a probe into its property services unit. Shares of Evergrande have been suspended from trading since 21 March 2022 as it was not able to deliver its financial results on time.
- Heichinrou, a Chinese restaurant in Japan founded 138 years ago, has filed for bankruptcy protection. The total debt for the main branch is 300 million yen. This is part of a trend of COVID-19 related closures of eating and drinking establishments, which as of June 2022 stood at 536 bankruptcies. The company’s branches in Tokyo, Osaka, and Kitakyushu, which are operated by separate companies, are to stay open.
- Japan liberalized its power market in 2016 breaking the monopoly that regional companies held which allowed hundreds of small power companies to enter the market. The war in Ukraine has affected Japanese power companies, with 14 filing for bankruptcy. In March, 14 companies halted power retail operations while 7 companies temporarily halted taking on new customers for some plans. There are 700 Japanese power retailers, and the bankruptcies so far relate to companies which are relatively small in size. Some of the companies affected include West Holdings Corp., Hope Energy Inc, and Rakuten Energy Inc.