Every entrepreneur’s goal is to provide a solution to society by providing goods or services which are differentiated and which solve a specific problem. Such action assumes the business will remain a going concern. Along the journey of the business, poor economic conditions or poor management decisions affect the business resulting in its inability to service its obligations as they fall due.
If a company sustains a long period without paying its liabilities, the company is financially distressed; such companies experience decreased product demand as a result of not being able to stock sufficient and required inventory, which in turn is attributable to the company’s inability to meet obligations to suppliers. This situation leads to high cost of financing and unfriendly terms of trade.
WHAT HAPPENS TO A COMPANY IN FINANCIAL DISTRESS? PART VIII – INSOLVENCY ACT OF 2015
When a company gets into financial distress, it can be placed under administration. Part VIII of the Insolvency Act 2015 (the Act) requires appointment of a qualified person (appointed by court, the company or holder of floating charge) as an administrator to manage the affairs of company. The overall objective is to maintain the business as a going concern and avoid liquidation. However, administration isn’t always successful and liquidation becomes inevitable. Part VI of the Act guides on the liquidation process but liquidation is considered only after the administration process. While administration is an option available to restructure a company, the Act introduces other alternatives.
COMPANY VOLUNTARY ARRANGEMENTS (CVA) – PART IX OF THE INSOLVENCY ACT OF 2015
A company in financial distress doesn’t need to wait for the administration process. The directors of the company may propose to the company creditors a voluntary arrangement on how to settle the outstanding debt. In making the proposal, the directors of the company appoint a licensed insolvency practitioner to guide the CVA process.
THE CVA PROCESS
Step I – The Proposal
The company, through its board resolves to utilize CVA as a way to restructure the business. The board then makes a proposal to its shareholders and creditors for a voluntary arrangement with respect to its financial affairs. The directors must also nominate a Provisional Supervisor, “the Supervisor” who must be a licensed insolvency practitioner to supervise the implementation of the voluntary arrangement. The proposal should include the following:
- Information about the company & background
- A Statement of affairs
- Proposed method for restructuring the outstanding debts: senior lenders, preferential creditors, and unsecured creditors. This would include waiver of interest and penalties, lengthened debt tenor, moratorium, haircuts, debt equity conversion among others
- Impact of the restructuring process on the financial position of the business
- Turnaround business optimization strategy
The Supervisor reviews the proposal and gives his opinion on whether it has a reasonable chance of success. Once the Supervisor is satisfied with the proposal, he files a report in court and asks the court for permission to convene a creditors’ meeting. The supervisor is also required to have confirmed the claims of the creditors prior to the meeting.
Step II – The Creditors’ Meeting
The main purpose of the meeting is to decide whether to approve the proposal as is, introduce modifications or reject it. A modification to the proposal may be approved if the company consents.
While the meeting is convened by the Supervisor, at the beginning of the meeting, the creditors must elect one of their own to be chairperson for the meeting. For voting purposes, the meeting is divided into 3 groups; secured creditors, preferential creditors and unsecured creditors
APPROVAL OR REJECTION OF THE CVA
Section 665 of the Insolvency Act of 2015 states that the proposal is approved if:
- A majority of the members of the company present at the meeting approves the proposal (Shareholders)
- A majority of the members of each group of creditors (number and value) present at the meeting approve the proposal. Approval by each group of creditors supersedes that of members in case members vote against the proposal
A proposal (with or without modification) takes effect as a voluntary arrangement by the company on the date in which the court approves and it is binding on the company and its creditors.
FIRST EVER CVA IN KENYA: UCHUMI SUPERMARKETS PLC AND THE ROLE OF INVHESTIA AFRICA LIMITED
Uchumi is currently facing financial challenges. Consequently, there is an urgent need to reorganize the business to be able to meet its financial obligations while responding to a highly competitive and evolving business environment.
In the reorganization process, management decided to liquidate a non-core asset, a 20-acre parcel of land in a bid to settle some of the debt partially and at the same time inject some liquidity into the business to finance working capital to enable the business to achieve revenue growth and consequently improve its cash flow position.
Uchumi Supermarkets PLC engaged InVhestia Africa Limited to prepare a debt restructuring plan. The proposal was presented to the creditors on 2nd March 2020, at Bomas of Kenya.
The proposal recommended the following to each category of the creditors based on cash flows
- Unsecured Creditors: 30% payment over six years on an annual basis, 30% discount or haircut and 40% conversion to non-cumulative convertible preferential shares
- Preferential Creditors: 100% payment over six years on an annual basis
- Secured Creditors: The proposal submitted included a mix of Lump sum payments, Full and Final Settlement (FFS), haircut or discount on the outstanding balance and restructuring the remaining balance over seven years
The table below summarizes the voting results of the Uchumi CVA proposal.
Written by James Wambua and Steve Ogada