No longer at ease: The conflicting duties of the receiver manager in the corporate rescue process

Receiverships have historically been viewed as a kiss of death to financially distressed companies. In essence, the receiver manager only has a duty to safeguard the interests of the appointing debenture holder, and not the whole body of creditors or the public. However, the ruling in Kimeto & Associates Advocates v KCB Bank Kenya Limited & 2 others [2021] may be considered a breath of fresh air possibly giving a chance for the recovery of companies placed under receivership.

In this case, KCB Bank (the Bank) a holder of a debenture created prior to the coming into force of the Insolvency Act, 2015 appointed a receiver to recover the debt owed by Mumias Sugar Company Ltd (Mumias). Two years into the receivership the creditors and the community through the Senate Committee on Agriculture and Fisheries complained of a lack of transparency and good faith in the operations of the debtor company. The receiver manager had ignored requests to furnish statements of accounts and had decided to lease the assets of the company for a term of 20 years. This prompted the creditors to petition the High Court (the Court) for an order restraining the receiver from selling or leasing Mumias’s assets and for an administration order.

A duty to the public
The Court held that the process of receivership was a matter of public interest and that the receiver had a duty to ensure the receivership process not only vindicates the private interests of a debenture holder but also all other secured and unsecured creditors. The Court also held that the insolvency process ought not be a private process between a creditor and a debtor.

Instead, the interests of the public should also be considered since their social and economic livelihoods are significantly impacted by insolvency decisions. This requires receivers to shift from the traditional approach and now balance between the interests of the secured creditors with that of equitable claimants such as employees and the public. In this case, the Court noted that Mumias was not just an ordinary business enterprise but that it was the largest sugar company in the region. Its collapse would have dire social and economic consequences to the sugar belt (Western Province).

Considering public interest
In determining the principles to be adopted in considering public interest the Court adopted the principles laid down by Professor Janis Sarra in Creditor Rights and the Public Interest: Restructuring Insolvent Corporations where she explained that it is in the public interest to:

• avoid premature liquidations. Restructuring schemes are a valuable mechanism to prevent them. These entail a temporary suspension of control or enforcement rights in order to provide an opportunity to establish the cause of financial distress and evaluate the prospects of rehabilitation;
• protect the claims of various stakeholders such that there is not a race to enforce individual claims to the detriment of other claimants;
• respect the statutory allocation of priority claims while still allowing parties the opportunity to determine their deferring claims in anticipation of generating value for the long term;
• enhance access to information about the insolvent firm to allow for informed negotiation for an optimal solution; and
• generate economic activity and create a going forward business strategy that preserves creditors, workers, and firms’ specific economic investments to maximise the wealth of the entity.

Bound by National Values
In addition, the Court held that a receiver was bound by the national values and principles of governance as enshrined in section 10 of the Constitution of Kenya of 2010. The Court acknowledged that despite the dealings between Mumias and the Bank being a private affair, the process of receivership was a matter of public interest. The basis for this conclusion was that the rights of 3rd parties such as unsecured creditors, sugar farmers and employees were involved. Further, the fact that Mumias is a public body meant that the matters touching on it were a matter of public interest. The receiver by virtue of his position was therefore bound by section 10 as he was deemed to be implementing public policy decisions. The import of this decision is that receivers now have an obligation to be transparent and accountable while undertaking their duties in the receivership process. They are now required to disclose the particulars of the receivership process to third parties.

The Court further held that it had the jurisdiction to intervene in the receivership process and to supervise the actions of a receiver in order to take care of the public interest although in an unhindered manner. It issued an administration order and directed the receiver to also act as an administrator. It was of the view that nothing in the Act prevented the running of administration and receivership concurrently as in this instance the objects of both these processes were aligned – the recovery of Mumias.

Conclusion

This case shows that the courts are leaning towards collective insolvency proceedings that involve all creditors notwithstanding the right of a debenture holder to enforce its security. Receivers appointed under these debentures must now balance the conflicting interests in the receivership process noting that the court has the jurisdiction to interfere in their decisions on account of public interest.