Court Grants Temporary Reprieve to TransCentury and East African Cables Against Receivership

The High Court in Nairobi has temporarily protected investment firms TransCentury Plc and its subsidiary, East African Cables Plc, from receivership. This ruling stems from a default on a Sh5 billion loan owed to Equity Bank, and the court’s intervention gives the two companies a four-month window to repay their debt or face the consequences of receivership. Justice Alfred Mabeya, who presided over the case, emphasized that this temporary reprieve will lapse if the firms do not settle the loan within 120 days. Failure to do so would lead to the appointment of receiver managers to take control of their operations.

This case highlights the delicate balance between allowing a struggling business to stabilize and a lender’s right to recover its money. The court’s decision showcases the importance of judicial discretion in determining whether a company should be given time to recover or pushed into receivership. The outcome could have significant implications for the businesses, their employees, and the broader Kenyan economy.

Temporary Reprieve and its Conditions

The reprieve granted by Justice Mabeya is conditional. TransCentury and East African Cables must repay the Sh5 billion debt within 120 days. If they fail to do so, the temporary relief automatically expires, and Equity Bank would have the right to move forward with appointing receivers. Justice Mabeya’s decision reflects a thoughtful consideration of the companies’ financial situation and the broader impact receivership would have on their operations.

“The consequential realisation of the securities shall attach once they fail to repay the debt within the stipulated period,” Justice Mabeya stated, adding that the appointment of receiver managers would effectively mark the end of the companies if the debt remained unpaid. His ruling is a nod to the principle that receivership should only be used as a last resort after all avenues for debt repayment have been explored.

Judicial Perspective on Receivership

Justice Mabeya underscored the court’s responsibility to ensure that receivership is only deployed as a final measure. He stated that premature actions, such as placing a company under receivership too early, can harm the viability of a business. Receivership disrupts normal operations, which in turn affects the debtor, its employees, customers, stakeholders, and even the broader economy.

His ruling acknowledged the critical role that businesses like TransCentury and East African Cables play in Kenya’s industrial landscape. Therefore, giving them a chance to stabilize and address their financial obligations serves not only the interest of justice but also the economy. “The court finds that in the interest of justice, receivership ought to be a last resort to ensure a debtor is granted a fair opportunity to address its financial obligations before drastic measures are undertaken,” the judge remarked.

The court also recognized the efforts made by the two firms to turn their fortunes around. TransCentury had initiated a rights issue aimed at raising Sh2 billion, and this capital infusion could potentially improve its financial standing. The judge noted that the companies have been making attempts to repay the loan, adding that Equity Bank’s haste to appoint receivers was ill-timed, given the ongoing negotiations.

Financial Strategy: The Rights Issue

Central to TransCentury’s financial recovery plan is the rights issue it initiated to raise Sh2 billion. Justice Mabeya took this into consideration when making his decision, noting that the success of this rights issue could substantially boost the company’s ability to repay its outstanding debts. The court was presented with evidence indicating that TransCentury had already raised Sh828 million through this mechanism, a promising start despite falling short of the Sh2 billion target.

In legal filings, the company argued that this rights issue was crucial to its capital injection strategy, which would have enabled it to offset a significant portion of its debt. Through its lawyer, Philip Nyachoti, TransCentury explained that the appointment of receiver managers last year had destabilized the company and hindered its efforts to raise additional capital.

Equity Bank, on the other hand, disputed these claims. The lender pointed out that East African Cables had requested a 24-month moratorium on the repayment of the principal loan in June 2023 but failed to provide adequate details about its rights issue. The bank also argued that the rights issue, which was approved by the Capital Markets Authority (CMA), had failed to raise the anticipated Sh2 billion, further justifying its demand for repayment.

Dispute Over the Appointment of Receivers

The appointment of George Weru and Muniu Thoithi as receiver managers is at the heart of this dispute. TransCentury and East African Cables, through their legal team, argued that the appointment of the receivers violated sections of the Insolvency Act. Nyachoti contended that the takeover of the companies by the receivers was unlawful and destabilized the companies’ operations at a critical time.

In their defense, Equity Bank insisted that the companies had defaulted on their obligations and that the appointment of receiver managers was necessary to recover the funds. According to the bank, TransCentury and East African Cables had admitted the debt and failed to make sufficient payments on the credit facilities, which justified their move to appoint the receivers.

Justice Mabeya, however, sided with the two firms, ruling that the receivership should be suspended to give them time to address their financial situation. He noted that in similar cases across Kenya, companies placed under receivership rarely recovered and often collapsed. “It has always been a one-way ticket. The company would collapse, workers laid off into the uncertain future with the current hard economic times and bring to a halt any trading activities of the company,” the judge said.

The Implications of Receivership

The prospect of receivership looms large over TransCentury and East African Cables. If they fail to repay the Sh5 billion loan within 120 days, the temporary reprieve will expire, and Equity Bank will proceed with placing the companies under receivership. Such a move would likely result in the companies ceasing operations, laying off workers, and disrupting their business activities.

Receivership, while a legal mechanism for creditors to recover funds, often spells the end for a company. The appointment of a receiver manager means that control of the business shifts from the existing management to the receiver, whose primary goal is to recover the creditor’s money. As Justice Mabeya pointed out, receivership rarely allows a company to regain its footing, especially in challenging economic times.

Looking Ahead: Will TransCentury and East African Cables Survive?

The next four months will be critical for TransCentury and East African Cables. They must raise sufficient funds to repay the Sh5 billion debt or risk being placed under receivership. The companies will need to accelerate their efforts to stabilize their financial position, either through additional capital-raising initiatives or other restructuring measures.

The court’s decision to grant temporary relief shows that there is still hope for the two firms, provided they can meet their financial obligations. However, time is of the essence, and the pressure is on TransCentury and East African Cables to turn their fortunes around before the 120-day window closes.

In summary, the High Court’s ruling has given TransCentury and East African Cables a chance to avoid receivership, but the clock is ticking. Their ability to repay the debt and implement a viable recovery plan will determine their future and the livelihoods of their employees, suppliers, and stakeholders.