Retaining management key in recovery for firms under administration

[dropcap]T[/dropcap]his year two high profile companies have been placed under Administration Nakumatt Holdings and ARM Cement formerly Athi River mining. First was Nakumatt Holdings, the family-owned retail giant that went under the administration of PKF’s Peter Kahia in January 2018, when it was unable to meet its financial obligations after failing to secure a strategic investor to pump in funds.

ARM CEMENT, listed on the Nairobi Stock exchange since 1997, was placed under administration this year after experiencing cash-flow constraints. ARM is under joint administration of Muniu Thoiti and George Weru of PricewaterhouseCoopers (PwC), who took over the management of the cement maker on 17^th August, just days after chief executive Pradeep Paunrana had accepted to resign from executive roles and allow CDC to takeover.

However, that did not go as planned for CDC as the administrators were brought in to manage ARM, once the darling of the stock exchange for both local and foreign investors .

Administration has presented a different ballgame for Kenyan companies which had been used to being placed under receivership or being walked straight into to the liquidation guillotine. Like receivership, administration is applied during financial difficulty and cashflow constraints. Administration stops any legal action or process against a company, unless the administrators or the court allow.

In Kenya, before the enactment of the Insolvency Act, 2015, there was no corporate rescue mechanisms and insolvent companies capable of being turned around would inevitably be forced into liquidation, with losses to the creditors and shareholders.

Indeed, administration is a fairly new development in Kenyan law as it was introduced by the Insolvency Act, No. 18 of 2015 as an alternative to liquidation to maintain the company as a going concern; achieve a better outcome for the company’s creditors than liquidation would; and realize the property of the company in order to make distributions to secured or preferential creditors.

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Legal and management experts say being the first significant private sector insolvency restructuring in Kenya under the new Act, ARM and Nakumatt cases should be done professionally and with due care since they set precedent to future restructurings.

An administrator of a company is required to perform the management/board functions in the interests of the company’s creditors and other stakeholders. But there have been fears over the fate of top management when administrators take over with the temptation to overhaul management.

The essence of administration is to give Nakumatt and ARM a chance to put their houses in order, including settlement of debts, but not an opportunity to replace management or hit back at the board.

The administrators should ideally take control of the business assets and the management of the affairs of the companies. Powers of the directors of the company in terms of dealing and/or transacting with the company’s assets ceased, unless with the express permission of the administrators. But management remain critical players in the administration and journey to recovery or, in the worst case scenario, liquidation.

Nairobi-based lawyer Nancy Karanu says while management and the board are answerable to the administrator, the best practice is to keep management intact to the end of administration. “The board and management are relieved of their statutory duties under administration and it’s impossible for them to discharge any duties without consulting the administrator. But they are the custodians of information and institutional information,” she says.

Mrs Karanu, a partner at Karanu & Kanai Advocate, says management should be changed in only “very peculiar” situations where, for instance, the managers are not aligning with the policies of the receiver manager or administrator.

The administrators have retained the Paunrana as Managing Director to work with them in finding a solution for the cement firm.

She said another situation that could possibly lead to change of management while under administration is when the managers engaged in impropriety and are facing charges in court. “The administrators work is mainly to secure assets and protect them from dilution,” she says. “And this would best be achieved when the administrator or receiver manager works with the management, which understands the business better in terms of strategy and financials.”

The administrator initially reviews the company’s position and collects information about the company.  They then assess whether there is there is the support (of the employees, the suppliers, the customers and a founder if required) to continue to trade the business. These key roles largely determine recovery and can only be achieved through collaboration between current management and the administrator.

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This means there has to be rapport between the management (and board) and the administrator. In the case of Nakumatt, which has been in administration for eight months now, top management has remained intact and some of those who have left have done so on their own volition.

The same applies to ARM Cement where CDC was in the middle of a battle for control of the company with the Paunrana family when the administrators were appointed. The administrators have retained the Paunrana as Managing Director to work with them in finding a solution for the cement firm, a strong Kenyan business under severe cashflow constraints due to the challenges it faced in Tanzania.