Nairobi — The stock market wants the law on insolvency amended to protect firms hit by temporary financial problems.

It says the Bankruptcy Act has been abused with receivers quick to liquidate firms that could easily be revived.

The Nairobi Stock Exchange (NSE) proposes that receivers be forced by law to first attempt comprehensively to revive such firms before selling or shutting them down.

Restructure

Currently, there is no legal requirement that a receiver attempt to run the firms they take over as viable businesses, said NSE chairman Jimnah Mbaru in a letter to the Attorney General Amos Wako, which was copied to the press.

With reference to Uchumi Supermarkets Limited, he said: "The Uchumi recovery process has demonstrated that stakeholders in Kenyan companies, if given the opportunity, are willing to restructure a company facing insolvency problems. Unfortunately, the Bankruptcy Act does not provide the legal basis for such an option."

The NSE chief considers the current situation a legal shortcoming, that might result in a company's assets being sold cheaply, even when they are of more value than the debt owed. Mr Mbaru said: "Since receivers and creditors may not be in a position to appreciate the real value of a company. They may hastily move to liquidate a potentially strong company suffering from short-term cash flow crisis." The result of such liquidation, he noted, was loss of jobs, reduced taxes payable to the Government and a lack of distribution line for the company's suppliers.

While efforts to reopen Uchumi after it collapsed in June were welcome, he said it was important that the restructuring process of insolvent companies have a proper legal basis.

He notes that in the US, Chapter 11 of the Bankruptcy Code provides for legal provisions that afford companies the right to file for protection from the sale of their assets by creditors, as the companies restructure.

Said Mr Mbaru in the letter: "Companies may choose to file Chapter 11 for protection for a variety of reasons; their long-term revenues may be higher than the liquidated value of the assets, financial difficulties may be temporary and the debtor companies may have the capability to return to solvency in the long-term." Reforming the Bankruptcy Act would give firms with the legal basis for the reorganising debt and returning to solvency, he said.