A couple of days ago, Deacons East Africa was put under administration due to financial difficulties and recurrent losses.
Consequently, the firm was suspended from the Nairobi Securities Exchange (NSE) market for 40 days.
However, managers and decision makers rarely think about consequences of placing a company under administration
Historically, very few firms recover from their financial woes after being placed under receivership.
A good example is government owned Kenatco Taxis Ltd which decided to take a Ksh22.4 million bank loan in mid 1980s, with the objective of increasing its fleet. Over ten years later, the company was unable to pay its loan hence placed under administration in 1996. Today, the loan has ballooned to almost Ksh500 million and counting.
Despite being under statutory management for over 20 years, Kenatco has not shown any signs of recovery.
Other firms placed under statutory management include Chase bank, Imperial bank, Nakumatt, Dubai Bank (to be liquidated),United Insurance, Standard Assurance, Blueshield Insurance, Concord Insurance among others. Their fate seems sealed today, that they will remain in books of history as multi-billion firms that couldn’t survive harsh economic conditions. None of them has ever recovered.
Back to Deacons case, which applies to all companies, the cost of such administrators is quite substantial and after spending a few months, running the business, they will usually recommend that the company hire specialists who can then provide a sound decision as to whether to sell the company or make structural changes to turnaround the company.
All these consultants charges are going to be substantial and will be paid before any creditors are paid.
In most cases, the Board and particularly the CEO are accountable for the poor financial state of the company.
It is clear that the cause of the company’s misfortune is ambitious & rapid expansion by opening new stores in costly shopping malls, just as it happened with Nakumatt.
By allowing the Board to appoint the administrators, the Board & particularly the CEO have escaped taking any responsibility for the mess they have created. The creditors, particularly the suppliers and the landlords, are not able to file a case for receivership because of the appointment of the administrators.
Is it time for the law to be looked at and amended if interests of all parties are to covered equitably?
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