ARM Cement
Barack Obatsa
Deacons East Africa
Lion Asset Management
Nakumatt Supermarkets

Administration law likely to be abused

Administration law likely to be abused

Shoppers outside a Nakumatt store. The chain went into administration last year. PHOTO | LABAN WALLOGA

ICEA Lion Asset Management has asked financial market regulators to ensure company administration law is not turned into a tool for struggling firms to amass debt then shield themselves from repaying. Chief Investment Officer Barack Obatsa says the revised Companies Act that allows distressed firms to go into administration and spare them liquidation may be prone to abuse, exposing investors to losses.“The law is good since it can come out with better outcomes if well managed … but it can be abused. A company can easily put itself under administration,” said Mr Obatsa.Last year, Nakumatt Supermarkets, ARM Cement and Deacons East Africa moved into administration, piling uncertainty on lenders and investors. The three are deeply indebted.Going forward, Mr Obatsa said investment firms and banks would now have to carry out more due diligence to understand fundamentals of heavily indebted firms before committing to fund them.“The underwriting process has to change and investors have to be more careful in investing in companies that are highly leveraged. We will probably demand a much higher return from such companies,” he said.This means that the revised Companies Act may serve as double-edged sword for struggling firms.While it is going to cushion them from creditors and allow them time to try and resuscitate the business, it would, on the other hand, make it hard for them to access credit.

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The threat is elevated in the era of capped interest rate and International Financial Reporting Standards (IFRS) 9 that has seen banks become more reluctant to lend to firms with weak financial backbones.When a company is placed under administration, existing management paves the way for independent administrators who then try to kick-start the business with hope of saving investors from the loss that often comes with liquidation.However, this means investors fortunes are tied in the company for longer period with no guarantee that the administrators will revive the business.

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