Week 12_Receivership.Pdf

RECEIVERSHIP
WEEK 12
Materials prepared by Augustus Mbila for MKUSoL

Introduction
▪Historically, receivership is not an insolvency proceeding, but merely
a method by which a secured creditor can enforce his security.
▪Originally, a mortgagee whose mortgagor defaulted could apply to the
court to appoint a receiver to collect the rents and profits of the
mortgaged property and apply these to the payment of the mortgage
interest.
▪Subsequently, it was found more convenient for the appointment to be
made by the mortgagor himself at the request of the mortgagee, thus
obviating an application to the court.
▪Later on, mortgagees began reserving the power to make the
appointment themselves, at the same time providing that the receiver
was to be the agent of the mortgagor, not of the mortgagee.

Introduction cont’d
In due course, the power to appoint a receiver of income was made statutory under the
Law of Property Act of 1925 in the UK, although it was the practice to exclude or expand
the statutory provisions relating to the circumstances in which a receiver could be
appointed and his powers on appointment. However, the role of such a receiver was a
receiver of income.
With the expansion of business and the increased provision of credit to
finance the establishment and operation of the undertaking, creditors
became increasingly concerned to secure stringer protection for their
investment.
In particular, by reserving the right to appoint not merely
a receiver but a manager of the business, the two offices
almost invariably being combined in the same person

Introduction cont’d
▪ In order for the receiver and manager to have effective powers of management
it was necessary to provide the creditor with global security covering the
whole or substantially the whole of the company’s assets and undertaking.
▪ Thus evolved the modern debenture which typically created a fixed charge
over fixed assets and a floating charge over the rest of the company’s
undertaking, with power to appoint a receiver and manager, having extensive
authority to get in the assets, run the company’s business and dispose of the
assets either piecemeal or as part and parcel of a sale of the business as a
going concern.
▪ A debenture holder could still apply to the court for the appointment of a
receiver but there was little advantage in doing so, for an application to the
court would involve time and expense and the receiver’s powers would be
circumscribed by the terms of the order and his need to work within a judicial
framework, whereas a receiver and manager appointed pursuant to the
debenture had all the powers conferred by the debenture and could still be
declared to act as agent of the mortgagor.

What Receivership entails
▪Receivership is not a true collective insolvency proceeding but
remains in principle a method by which a particular debenture
holder can enforce his security.
▪A receiver is a receiver or manager of the whole (or substantially
the whole) of a company's property appointed by or on behalf of
the holders of any of the company secured by a charge which, as
created was a floating charge, or by such a charge with one or
more other securities.
▪The receiver does two things; one continues to trade in the hope of
bringing the company, or part of it around to profitability again, or
he puts it into 'liquidation', which means the company stops
trading and all the assets are sold for the benefit of the creditors

Receivership cont’d
▪At the end of the receivership the company can be returned
to the directors and shareholders (successful receivership),
it can be wound up (failed receivership) or the company can
go into corporate voluntary arrangement
▪Before the enactment of the Insolvency Act in 2015,
administrative receivership bore the brunt of criticisms as a
rescue mechanism of companies in financial distress
▪In Showind Industries Ltd v Guardian Bank Ltd &
another [2002] eKLR, Joy V Bhatt, the receiver/manager
was appointed by Guardian Bank Ltd on 10th May 2001

Receivership in Kenya…
▪Showind Industries Ltd claimed that the appointment of the receiver was
pursuant to powers conferred by a debenture which was illegal and
unenforceable
▪The company also complained that the appointment was in any case
premature and unlawful; and that the receiver/manager had so
mismanaged the affairs and business of the company that unless stopped,
the company would collapse
▪The company’s case was therefore that first, the debenture had not been
registered as required by law and it was not supported by consideration.
Secondly, the power to appoint a receiver had not crystallized as there
had been no formal demand and none of the events which under the
debenture could have precipitated the appointment had occurred. Thirdly,
the conduct of the receiver/manager was such as to justify a mandatory
injunction to evict him from the premises.

• Justice Ringera noted that the debenture need not have been
registered as it was under seal. It is trite principle of contract law
that contracts under seal need not be supported by consideration.
He also noted that a statutory demand need not have been issued,
before placing the company under receivership, since the
company had defaulted on its loan of Kshs 700,000 and therefore
the creditor was justified in protecting its interests in the
company’s assets
• Ringera also found that the receiver/manager had accounted for
all his operations and was therefore not guilty of
mismanagement. In any case, it was the company’s directors who
had mismanaged the company. He therefore dismissed the case

▪In FINA BANK LIMITED vs SPARES & INDUSTRIES
LIMITED[2000] eKLR, the respondent company obtained,
from Fina Bank, a loan of Kshs.20 million, and an overdraft of
Kshs.55 million, to meet the cost of construction of some
building and also to meet working capital requirements. Both
facilities were to be secured, firstly, by a first charge in favour of
the applicant covering various immoveable assets, to wit L.R.
No.209/3467, L.R. No.209/303, L.R. No37/7243, L.R
No.209/1194, among other property, all valued at Kshs.77
million; secondly a general debenture for Kshs.75 million in
favour of the applicant covering all the assets of the respondent
company and, thirdly, a joint and several guarantee for a similar
sum by two of the directors

The loan was to attract an initial rate of 31% per annum which was
subject to change at any time without any prior notice to the
respondent.
The applicant's rights under the debenture included the right to appoint a
receiver or receivers and managers over the assets and business of the
respondent in the event the respondent defaulted in paying any one instalment or
any sums upon demand
The respondent company only paid a few instalments and applied for an
additional loan. At the time of going to court, total debt, according to the
applicant, stood at Kshs.88,402,412.32 which it demanded with interest
at the rate of 37% per annum with monthly rests, from 1st October,
1999 until payment in full, but "not later than 1st November, 1999"

The respondent defaulted and on 2nd November, 1999, the applicant
addressed a second letter of demand requiring the former to pay
forthwith all sums due to it which had then increased to
Kshs.90,505,556.02, failing which the applicant would appoint a
receiver or receivers over all the respondent's undertakings, assets,
revenues and rights in exercise of the powers conferred on it by the
aforementioned debenture
The respondent again defaulted, and on the same day, namely, 2nd
November, 1999, the applicant appointed Vijay Chhotalal Malde
and Subhashchandra Girdharlal Devani to be joint receivers and
managers of the respondent's assets and business. The receivers and
managers immediately notified in writing, all the directors of the
respondent of their appointment and what they expected from them

▪The company moved to court for an injunction and Mulwa J held
that the length of the notice the applicant gave to the respondent to
pay all sums due to it was too short and unreasonable and, it
therefore, rendered the appointment of the receivers and managers
premature. He then proceeded to grant the injunctive reliefs which
were prayed for in the application. The receivers and managers were
thus forced out
▪The court (Kwach, Bosire, and O’Kubasu JJ) noted that the
agreement between the company was based on contract and each
party was bound by the terms of the contract. As such, the court had
no power to interfere with the terms of contract in the absence of
mistake, fraud or misrepresentation. The court therefore reinstated
the receivers and lifted the injunction pending an appeal by the bank

•The judges stated as follows:
“…We appreciate that the appointment of receivers may
not necessarily improve the respondent's financial position.
It is, however, one of the contractual remedies available to
the applicant for the respondent's default in loan
repayment and the applicant should not be hindered from
exercising it without good cause. It is owed a substantial
amount of money and it is only proper that it takes such
steps within its rights under its contract with the
respondent to mitigate its loss in the event its intended
appeal eventually succeeds…”

▪At the same time, Fina Bank had a pending appeal against the
decision of Mulwa J to order the receivers to vacate the company’s
premises. The appeal was in FINA BANK LIMITED v SPARES
& INDUSTRIES LIMITED [2000]eKLR, civ app 51 of 2000.
▪While determining the appeal, Justices Tunoi, O’Kubasu and Shah
determined that the bank had several securities at its disposal and
should not have resorted to the debenture to appoint receivers.
▪The judges therefore ordered the receivers to vacate the premises
and upheld the decision of Mulwa J.
▪This demonstrates a case of courts not agreeing on and/or
understanding the nature of receivership

• The judgment was written by Tunoi J and he pronounced himself as
follows:
“…The issue of Receivership is an emotive one and I understand why
the respondent had to resort to litigation. It destroys the business. It is
expensive. The appointment of Receivers and Managers may not
necessarily improve the financial position of the business. These, in my
view, are matters for consideration as to whether to grant a temporary
injunction or not. I am satisfied that all these observations were in the
mind of the learned Judge when he acceded to the application for
injunction. Indeed he acted in accordance with the principles laid down
in Giella v Cassman Brown & Co. Ltd [1973] EA 358 and came to the
correct decision. I find no ground to fault him as he had exercised his
discretion correctly and judicially…”

▪ Perhaps the judges of the CoA should have contextualised the English case of
re Potters Oils Ltd [1986] 1 WLR 201 where it was held that a Debenture
holder which has a right to appoint a receiver is under no duty to refrain from
exercising its rights because doing so might cause loss to the company
▪ The court might also have been properly guided had it read the CoA judgment
in Madhupaper International Ltd v Kerr[1985] eKLR (Kneller, Nyarangi,
and Gachuhi JJA) where the judges observed ”...It is correct law that a
debenture holder which has this right is under no duty to refrain from
exercising its rights because doing so might cause loss to the company or
its unsecured creditors. See Cuckmere Brick Co Ltd v Mutual Finances
Ltd [1971] Ch 949, 965; in Re Potters Oils Ltd 1985 Ch D Hoffman J, The
Times November 26, 1985 so there could be no duty to refrain because the
company is bent on building up another business which the debenture
holder is sure is doomed to failure from the outset…”

Receiver-ship under the Insolvency Act
The Insolvency Act does not provide for receivership for
debentures created after 2015
Holders of a qualifying charge can no longer appoint receiver
managers. They can only appoint administrators
Section 534 provides that the holder of a qualifying floating charge in
respect of a company's property may appoint an administrator of the
company
There must be a provision in the floating charge empowering the holder
of the floating charge to appoint an administrator of the company

Receivership under the Insolvency Act
▪The person must be the holder of debentures of the company secured—
(a) by a qualifying floating charge that relates to the whole or
substantially the whole of the company's property; (b) by a number of
qualifying floating charges that together relate to the whole or
substantially the whole of the company's property; or (c) by charges and
other forms of security that together relate to the whole or substantially
the whole of the company's property and at least one of which is a
qualifying floating charge
▪Per section 536, a person may not be appointed as administrator under
section 534 if the floating charge on which the appointment depends is
unenforceable
▪After making the appointment, the person must lodge with the court a
notice of appointment Materials prepared by Augustus Mbila for MKUSoL

Receivership under the Insolvency Act
▪The notice must include a statutory declaration that the holder
of the charge qualifies to make the appointment. It must also
declare who the administrator is
▪The appointing authority shall then shall notify the
administrator and any other person involved in the process, as
soon as possible.
▪Once an administrator is appointed this way, he will have the
powers and duties of any other administrator as discussed last
week under the topic of Administration, which means that
they will manage the business as a going concern for the
benefit of creditors.

But what is a floating charge?
▪A floating charge, also known as a floating lien, is a security interest
or lien over a group of non-constant assets that may change in
quantity and value
▪Companies can also secure loans using fixed assets like equipment
and real property like land. However, with a floating charge, the
underlying assets are usually current assets or short-term assets that
can change in value.
▪Floating charges allow business owners to access capital secured
with dynamic or circulating assets. The assets backing the floating
charge are short-term current assets, usually consumed by a company
within one year.
▪The floating charge is secured by the current assets while allowing
the company to use those assets to run its business operations

Floating charge cont’d
▪Current assets are those business possessions that the firm can
quickly liquidate for cash and include the accounts receivable,
inventory, and marketable securities, among other items. For
example, if inventory is used as collateral for a loan, the company
can still sell, restock, and change the value and quantity of its
inventory.
▪In other words, the value of the inventory changes over time or floats
in value and quantity.
▪If a company fails to repay the loan or enters liquidation, the floating
charge becomes crystallized or frozen into a fixed charge. With a
fixed charge, the assets become fixed by the lender so the company
cannot use the assets or sell them.

Floating charge cont’d
Crystallization can also happen if a company ends operations
or if the borrower and lender go to court and the court appoints
a receiver. Once crystallized, the now-fixed rate security
cannot be sold, and the lender may take possession of it.
The difference with fixed charges is that typically, fixed
charges are secured by tangible assets, such as buildings or
equipment. For example, if a company takes out a mortgage on
a building, the mortgage is a fixed charge, and the business
cannot sell, transfer or dispose of the underlying asset—the
building—until it repays the loan or meets other conditions
outlined in the mortgage contract.

The current position…
▪ The current position on receivership is the one taken by the court in the case of
I&M Bank Limited v ABC Bank Limited & another [2021] eKLR
▪ In this case, I&M Bank (I&M) granted the Hillport Ltd (Hillport) facilities of
up to an aggregate principal amount of Kshs 1,200,000,000/- which were
secured by the following securities issued by the Hillport in favour of I&M: A
debenture dated 10th December 2014 securing an aggregate maximum principal
amount of Kshs 750,000,000/- together with a charge of the same date over
Hillport’s property Title No. Kajiado/Kisaju/2450 securing the same amount, a
further debenture dated 9th March 2017 securing an aggregate maximum
principal amount of Kshs. 70,000,000/-, a second further debenture dated 12th
September 2017 securing an aggregate maximum principal amount of Kshs.
380,000,000/- accompanied by a further charge of the same date created by
Hillport over its property known as Title No. Kajiado/Kisaju/2450 securing the
same amount.

Current position cont’d
▪ ABC Bank Ltd (ABC) advanced to Hillport Kshs 60,000,000/- secured by a
fixed and floating debenture dated 1st July 2014 created by Hillport in
favour of ABC. First Community Bank Limited (“FCB”) advanced the
Company USD 1,180,000 secured by an all assets debenture dated 13th
April 2015. Following default of all these facilities, I&M Bank notified
ABC of its intention to appoint an administrator pursuant to section 535(1)
of the Insolvency Act. On 19th November 2018, ABC filed a Notice of
Appointment of Administrator together with a Statutory Declaration
indicating that it had appointed Julius Mumo Ngonga and Anthony Makenzi
Muthusi of Ernst & Young LLP to act as Administrators over the whole of
the Company’s property. On On 27th November 2018, I&M filed a notice of
motion seeking orders to restrain the administrators appointed by ABC from
carrying on their duties under the appointment and instead be replaced by P.
V. R. Rao as Administrator.

▪The following day, 28th November 2018, the court granted an
injunction restraining the ABC-appointed Administrators from
carrying out or continuing with the administration of Hillport and on
4th December 2018, the Court appointed P.V. Rao and/or Mark Mark
Gakuru, the Official Receiver to act as Interim Administrator pending
the hearing and determination of the application. On 6th December
2018, ABC filed a notice of motion to stay these orders and to
reinstate its administrators in office to carry out the administration of
Hillport and to remove P.V.R. Rao as the interim administrator of the
Company. FCB supported ABC’s application. The court (Majanja J)
framed these issued for determination: Whether the application filed
by I&M was competent, whether the ABC was entitled to appoint
administrators under the Insolvency Act, and if so, which creditor has
priority. Materials prepared by Augustus Mbila for MKUSoL

▪On the first issue, the court was convinced that the application by
I&M was competent and rejected ABC’s preliminary objection. On
the question of whether ABC was entitled to appoint administrators
under the Insolvency Act, the court stated as follows:
…One of the hallmarks of the Insolvency Act is the introduction
of the device of Administration to replace the
receiver(s)/managers(s) under the Companies Act (Repealed) in
order to meet the overall objective of ensuring that distressed
companies are given “breathing space” so that they remain going
concerns. In order to benefit from these provisions, the person
appointing the Administrator, without recourse to the court, must
be the holder of a qualifying floating charge under section 534(1)
of the Insolvency Act… Materials prepared by Augustus Mbila for MKUSoL

▪ The court therefore confirmed that the Insolvency Act replaced the concept of
receivership with the concept of administration. ABC debenture predated the
Insolvency Act because it was drawn in 2014. ABC opined that although the
debenture empowered it to appoint receiver managers, there was no difference
in the way receiver managers and administrators operated. On this point, the
court stated as follows:
ABC has argued that whatever name used, the duties of the
receiver/manager under its debenture are co-extensive with those of an
administrator appointed under the Insolvency Act hence for all intents and
purposes, just as it is entitled to appoint a receiver, it is also entitled to
appoint an administrator. I disagree with this position because section 520
of the Insolvency Act ascribes a specific meaning to the term
“administrator” and it relates to the manner of appointment rather than to
the functions. It states, “administrator”, in relation to a company, means a
person appointed under this Part to manage the company’s affairs and
property, and, if the context requires, includes a former administrator.

▪ The gravamen of the court’s position on this point is that an “administrator” is so-
called because of the way he/she is appointed, and not necessarily how he/she
operates. This is because he/she operates the same way a receiver manager would
operate. The court expressed itself more succinctly in paragraph 35 as follows:
As I have shown, the Insolvency Act is clear on the meaning of the term
administrator, the manner of appointment and the incidents of a company
under administration. The terms “receiver/manager” have a long history in
English common law and doctrines equity and nothing would have been easier
for the legislator to adopt them in the new statute. The purpose of the
Insolvency Act was to break away from the old law and give way to the
current practice that places a premium on rescuing or restructuring the
company as a going concern rather than winding it up. I therefore hold that a
receiver/manager appointed under the debenture or security document is
different from an administrator appointed under the provisions of the
Insolvency Act.

▪ The drafters of the Insolvency Act foresaw this conundrum, and therefore made this
provision: “734(2) Despite the repeal of the Companies Act, or of Parts VI to IX
of that Act, those Parts, and any other provisions of that Act necessary for their
operation, continue to apply, to the exclusion of this Act, to any past event or
proceeding preceding, following, or relating to that past event, even if it is a
step or proceeding that is taken after commencement.”
▪ Therefore, whilst the Insolvency Act proclaimed a departure from receivership
which was carried out to the exclusion of other creditors, to administration which
carries on board every creditor, creditors who were given power by their debentures
under the repealed Companies Act can still exercise those powers, oblivious of the
new administration regime
▪ ABC Bank should therefore have appointed receiver managers and not
administrators
▪ Justice Majanja’s decision in this case represents the current position on receivership
as juxtaposed with administration

Coming up…
Company voluntary arrangements
Pre-insolvency moratoria
Restructuring

END

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