A High Court in Nairobi has granted two investment firms reprieve by issuing temporary orders blocking Equity bank from placing them under receivership for the next four months for defaulting a Sh5 billion loan.
Justice Alfred Mabeya, however, said if Transcentury and its subsidiary, East African Cables Plc, will not have repaid the debt within 120 days, the temporary relief will automatically lapse.
"The consequential realisation of the securities shall attach once they fail to repay the debt within the stipulated period," the Judge said.
While justifying the relief, Justice Mabeya said the two firms demonstrated that once they are given adequate time, they will be able to repay the debt.
"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," he said.
The court acknowledged that any premature action can disrupt the viability of a business, which ultimately affects not only the debtor but also it's employees, customers, stakeholders and the economy in general.
Justice Mabeya reiterated that his orders are only to allow the two firms a period within which they should stabilise and re-organise their financial issues.
He considered the evidence in record which showed that the Transcentury has undertaken a rights issue intended to raise Sh2 billion, an amount that could significantly bolster the company's financial position.
He also took into consideration that the firms were making an effort to repay the loan and there was haste in attempting to appoint George Weru and Muniu Thoithi as receiver managers considering the negotiations that were ongoing.
"It goes without saying that once the receiver takes over the firms, that would spell a death knell for them," Justice Mabeya said.
He based his decision on past incidences in the country where receivership never turned around any ailing company.
"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.
Transcentury and its subsidiary East African Cables filed the matter seeking to block Equity bank from appointing the receiver managers.
Through advocate Philip Nyachoti, the firms claimed that in June last year, Equity bank appointed the receiver managers and taken over operations. Nyachoti argued that the unlawful takeover by the managers had destabilised the firms' operations.
"At the time, we were in the process of stabilising our rights issue to the tune of Sh2 billion for purposes of injecting capital that would be sufficient to offset any outstanding debt," Nyachoti told court.
He faulted the process under which the receivers were appointed saying it was unlawful for having violated certain sections of the Insolvency Act.
Equity bank in response to Nyachoti's application argued that the investment firms failed to make the necessary payments on the credit facilities, leading to a demand made on June 8 last year.
The court heard that East African Cables Plc requested the bank for a 24-month moratorium repayment on the principal loan and at the time admitted the debt.
But according to Equity bank, the firm failed to inform it of the rights issue in its holding company, Transcentury Plc.
The lender stated that as of March last year, the rights issue approved by the Capital Markets Authority (CMA) had closed and the amount raised by East African Cables PLC was Sh828 million.
"There was no further possibility of East African Cables Plc raising additional funds," the bank said.
It further argued that the rights issue was unsuccessful as the projected Sh2 billion was not achieved.