Four Red Cross hotels now under receivership

The move comes years after the management had strenuously tried to manipulate the accounting books to show the business was sound.

Four hotels owned by the Kenya Red Cross have been placed under receivership over failure to repay loans owed to the struggling National Bank of Kenya.

The move comes years after the management had strenuously tried to manipulate the accounting books to show the business was sound.

P V R Rao, an administrator appointed by creditors, has barred the current management from the business after taking over yesterday.

“None of the directors, shareholders, employees and no other person is authorised to transact any business on behalf of the company without express written consent from the administrator,” he wrote in a notice.

Implications of the receivership and the subsequent locking out of the Red Cross management could have huge implication for the hotels – three in Nairobi and one in Eldoret.

The hotels trade as Red Court, Boma Hotel Nairobi, Boma Inn Nairobi and Boma Inn Eldoret.

Placement of the hotels under administration follows the acquisition of NBK by KCB Group which has vowed to go after loan defaulters, including Red Cross.

Directors of KRC had as far back as 2014 indicated that the business was at risk of failing, considering that it was heavily indebted.

They were also notified that there was creative accounting where the land where the hotels were built are booked twice in the financial books.

Having the double booking in both the KRC and the hotels’ financials may have been meant to hide the actual status of the separate entities.

“The hotels have had significant questions on going concern raised by external auditors over the past two years and the Audit & Risk Committee inquired on progress made to address the issue prior to meeting the board on November 25, 2014,” read a confidential board document.

Financial records raised major concerns about the viability of the hotel as a going concern as the business had huge debts.

Further, the business was insolvent with negative capital, meaning the entire investment by the KRC had been wiped out by losses.

The last time the business had positive capitalisation was in 2011, before the losses piled and the insolvency levels soared to Sh1.4 billion in just three years.

In the three years, KRC pumped in Sh800 million, which disappeared.

“Clearly, the fundamental problem is inability to service commitments as they fall due within the immediate future and this is evident from the fact that the level of debt has been growing and has not been fully serviced, be it in terms interest or principal.”

They noted that liabilities were soaring at a much faster rate than asset accumulation, suggesting that the business was a bad idea after all.

Among the pointers that the hotels were dying was their inability to pay statutory payment including employees’ retirement saving despite having been deducted and taxes to the Kenya Revenue Authority.

Management was also directed to speak with lenders to review the terms of loans, including rescheduling repayment plans.

Directors were particularly concerned that the creative accounting that managers had employed would be smoked out as it could not be sustained for long.

“It (is) highly unlikely external auditors will overlook these facts and even if so, they will rely on management representation letter by directors and management to shift responsibility for concealing critical financial information which could amount to criminal liability,” the directors noted.

KRC would emerge as the biggest borrower from the distressed NBK, according to confidential documents, where the possibility of seeking a strategic investor was considered.

“Even if management wanted to, those funds are not available for recall without breaking serious financial bank commitment. A simple commitment to a potential investor that those funds are part of our long-term investment and would be converted to capital at the point of entry would suffice,” the directors wrote.