Red alert as borrowers run on empty

The last grain of Joyce Wanjiku’s fighting spirit was finally washed away by a wave of Covid-19.

Harangued by creditors over Sh9.5 million that she owed three local banks, the destructive forces of the pandemic left Wanjiku with no option but to seek the court’s protection.

She had borrowed the money to buy trucks for her construction business from I&M Bank, NIC Bank (now part of NCBA Bank) and CFC Stanbic Bank.

Initially, it was a family tragedy that befell her in 2017 and a volatile business environment in the same year that gave her sleepless nights.

As difficult as it was for Ms Wanjiku to honour her obligations, there was a flicker of hope that somehow her business could turn around. And in the end, she would start repaying her loans.

Then Covid-19 landed in Kenya in March, aggravating her financial predicament and making it almost impossible for her to repay the debts.  

High Court Judge David Majanja, in a judgement on October 9, took note of the debtor’s dire situation.

“She further states that she is unable to pay the outstanding debts as demanded as her operations have scaled-down due to the loss of one motor vehicle and the current Covid-19 pandemic, which has adversely affected the business,” said the judge.

He allowed Wanjiku’s request to be given time to reorganise her business to help her pay the debts.

The alternative would have been for her to petition the court to declare her bankrupt, or the creditors themselves, as a means to recover the money.

The reorganisation, she reckons, should involve an agreement with the creditors to restructure the loans, giving her more breathing space.

Wanjiku is not the only victim of Covid-19 and neither will she be the only one to seek protection of the court from creditors, who have also been cash-starved by the pandemic.

In fact, if official data is anything to go with, the flurry of petitions that will follow will not be an individual voluntary arrangement like Wanjiku’s but those of bankruptcy.

And this, experts say, will be aggravated by the end of the six-month loan repayment holiday arranged by the Central Bank of Kenya (CBK) to give some relief to borrowers.

During this period, banks largely concealed their claws.

But now insolvency activities are expected to spike as cash-hungry creditors move to recover their money while the “honest but unfortunate” debtors get protection from the court.

After three years, debtors who will have been put into bankruptcy will be discharged, ready for a fresh start with all their debts forgiven.

The Covid-19 pandemic has precipitated both a health and economic crisis.

In the three months to June alone, over 1.7 million jobs were lost as thousands of businesses buckled under the weight of stringent measures aimed at curbing the spread of the viral disease.

The containment measures also left a deep hole in the country’s gross domestic product (GDP), the sum of all goods and services produced.

Between April and June, GDP contracted by a record 5.7 per cent. This reflected a blistering business environment in which pubs, schools, hotels, airports and other establishments remained closed for the better part of the second quarter.    

Mark Gakuru, the Official Receiver based at the State Law Office, noted that while the number of people who have petitioned the courts to be declared bankrupt has declined compared to last year, they will soon pick up as the wall of protection that had been offered by the emergency measures wears off.

“It is not that people are not indebted. The issue is people recognise that there is a problem of Covid-19 right now,” he said, noting that banks had largely gone slow on defaulters distressed by the pandemic.

Instead, lenders helped the distressed borrowers to reschedule their loans by between six months and a year through the CBK-backed programme, which has seen loans valued at Sh1.12 trillion restructured.

Moreover, there was also a freeze on listing defaulters at credit reference bureaus (CRBs), a situation that saw insolvency practitioners go without a job when there were a lot of potential bankruptcies.

Data from the Official Receiver shows a correlation between a surge in bankruptcy applications and economic under performance. Mostly, the spike in applications follows a dark period of sluggish economic performance.  

For example, in 2017 when Wanjiku’s problems started, a prolonged electioneering period, a crippling drought and poor credit extension to the private sector combined to dent the economy. Construction activities were muted, leaving Wanjiku without business.

In that year, the country’s economy grew by 4.9 per cent, its worst performance since President Uhuru Kenyatta’s Jubilee Party swept into power in 2013.

In 2018, bankruptcy applications increased by more than three times to 71 from just 20.

However, by end of August this year, only five debtors had filed petitions to be declared bankrupt. There were only two creditors that wanted debtors to be declared bankrupt so they could recover their money.

The 31 petitions for liquidations of companies by court and the seven cases in which companies applied for voluntary arrangements total 45 insolvency cases in the first eight months of Covid-19.

There are also bankruptcy petitions in courts that have been blamed on the post-election violence of 2007, another year in which the country posted a dismal economic performance.

James Mwangi and his wife, Joyce Wangechi were selling agro-chemicals, veterinary products, animal feed, mineral licks and seed in Naroosura, Narok County, through a business known as Jajo Enterprises.

As the business grew, they opened another shop at Ewasonyiro Centre and even incorporated Jajo Enterprises Ltd, although they continued trading through their name.

Heavy burden

Then disaster struck in late 2007 and early 2008 following the disputed presidential elections of 2007. They also went to court to seek protection.

“The debtor further deponed that during the 2007-08 post-election violence all their assets and stock were stolen or destroyed, leaving them with a heavy financial burden,” said Justice Majanja in a judgement on March 30.

“As the economy continued to improve and with a desire to expand their business the debtor and his wife invested over Sh4 million to grow 27 acres of tomatoes. Unfortunately, the crop was destroyed by a pest known as Tuta absoluta and a disease known as tomato spotted wilt virus.”

Majanja agreed with the petitioners that they had since become too broke  to pay a debt of around Sh9 million.

Around the world, Covid-19 has seen record bankruptcy filings. More than 260 companies had declared bankruptcy in the US by June, with most of them blaming Covid-19.

In Kenya, being declared bankrupt is still viewed with stigma, whereas it is a special determinant of a country’s entrepreneurship, said Mr Gakuru.

“Bankruptcy and insolvency is one of the things which makes people to take risks,” said Gakuru, noting that with insolvency laws in place, people are not afraid of going to civil jail for taking risks.

“When you have reasonable risk-taking appetite as an entrepreneur, you should not be taken to jail.”

Resolving insolvency is one of the metrics used for determining a country’s ease of doing business in the World Bank’s Ease of Doing Business ranking.

After Kenya enacted the Insolvency Act, 2015 it dramatically moved up the ranking.

According to the World Bank, it will take approximately 4.5 years until a creditor is repaid some or all of the money owed to it upon completion of receivership proceedings.

“The delay is largely due to the inefficiency of courts and difficulty to organise hearings,” said the bank in the Ease of Doing Business report 2020.

It explained that in Kenya, it takes about two years until the final judgment is made to approve a creditor’s request for a debtor to be put in receivership, even as it appreciated that some of the lag is due to delaying tactics adopted by debtors or other unsecured creditors.

Gakuru decries cites this as one of the downsides of insolvency in Kenya..”the culture of always fighting even when you know your situation.”

In its latest bulletin, the Capital Markets Authority (CMA) noted how the delayed resolution of bank insolvencies has negatively affected the corporate bond market.

These banks include Chase Bank, since acquired by SBM, and Imperial Bank that is still under receivership.

CMA noted that as a result, there has been little interest in corporate bonds as a debt financing instrument.

“This situation re-emphasises the need for clear settlement finality and insolvency netting carve outs in the law across the full scope of capital market products,” said CMA in its annual report for 2017-18.

According to the World Bank, even after being granted the greenlight to put a company under receivership, it will take a creditor in Kenya an additional 2.5 years to find a potential buyer of the company, sell it as a going concern and receive the sale proceeds.

And then there are the costs associated with the case including for court, lawyers, accountants and assessors. The World Bank estimates these amount to approximately 22 per cent of the value of the debtor’s estate.

In the rich economies, it takes creditors only 1.7 years to complete an insolvency problem. Cost as percentage of the estate in OECD, a group of rich countries, is only 9.3 per cent.

In Africa, the best performer in insolvency resolution is Mauritius. Here, it will take a creditor 1.7 years to resolve an insolvency case. A creditor will spend 14.5 per cent of the estate’s value.

Ultimately, creditors in Mauritius are able to get 67.4 cents for every dollar they are owed.

In Kenya, creditors can recover up to 31.8 cents for every dollar. However, this is better than Sub-Saharan Africa’s average of 20.5 cents for every dollar.

One of the problems that Gakuru says he has faced when dealing with issues of insolvency is dishonesty.

“Many people come to insolvency but they don’t expect to pay creditors. Even when someone has properties he will still come and say he has none,” he said, noting that the lack of proper indexing of properties in Kenya has exacerbated this problem.

John Kamau was not so lucky when he sought to be declared bankrupt by the court for a debt of Sh50.2 million to various creditors, which he said he was unable to pay.

Stanbic Bank, one of the creditors, opposed the granting of insolvency, asserting that “it was an abuse of court process and a scheme by an able debtor to avoid financial obligations to third parties.”

Through an affidavit by one Hamilton Suba, Stanbic argued that when Mr Kamau was presented with a notice to show cause on November 15, 2017, he informed the court that he was willing to come up with a payment proposal within a month of that date.

Repayment proposal

Judge Francis Tuiyott agreed with the bank.

“This allegation has not been controverted by the petitioner and the court accepts it to be true,” he said.

“It would be expected that the petitioner would at least give an explanation of what had changed from November 15, 2017 when he promised to come up with a repayment proposal and November 27 when he deposes that he is unable to meet his debts and that his financial fortunes are at a sum of Sh180,000 only.”

Other cases of delay, and which were frustrated by the directors, include Athi River Mining and Nakumatt.

Fortunately, for ARM, there has been a fresh start after it was acquired by National Cement. For Nakumatt, shoppers have almost forgotten the imposing logo of an elephant. ?