The Solution?

The just concluded capital restructuring of national carrier Kenya Airways PLC, part of which involved twelve of its most significant creditors (the Government of Kenya and eleven commercial banks), is an interesting illustration of one kind of corporate restructuring available to struggling companies under the Companies Act, 2015.

Following huge losses reported in FY 2014/2015 (KES 25.7 billion) and FY 2015/2016 (KES 26.2 billion), the airline embarked on a comprehensive turnaround strategy to improve operations and financial performance. This included a review of the company’s capital structure with the objective, inter alia, of reducing the overall level of borrowings and increasing liquidity1.

Kenya Airways has implemented this strategy through various transactions; including a statutory scheme of arrangement for the conversion to equity of approximately US$ 238 million of unsecured debt plus US$ 26 million accrued interest owed to the Government of Kenya and approximately US$ 221 million of unsecured debt plus accrued interest owed to 11 commercial banks. The conversion was enhanced by provision of a sovereign guarantee from the Government that partially related to the banks’ existing exposure.

So how did Kenya Airways go about putting the scheme in place?

Schemes of Arrangement

Part XXXIV of the Companies Act 2015 sets out the procedure for implementing a court sanctioned scheme of arrangement through which a company can make a compromise or arrangement with its creditors and/or members (or any class of them). There is no statutory limit to what a scheme can address, and as such a scheme can be a compromise or arrangement about any matter that a company and its creditors and/or members may agree upon. However, it is important to note that for a scheme to be upheld by the Courts, it must contain an element of accommodation on each side, in other words a scheme cannot simply expropriate a member’s or creditor’s rights without granting any compensating advantage2.

The process for implementing a scheme requires that a company, or any creditor or member of the company, or the liquidator or administrator of a company in liquidation, apply to the High Court of Kenya requesting the Court to order a meeting of the creditors or the members of the company (or a class thereof), in such manner as the Court directs.

Following such an order, the company concerned is required to ensure that a notice of the meeting is made available to the affected creditors or members, together with a written statement that (a) explains the effect of the proposed compromise or arrangement, and (b) specifies any material interests of the directors of the company and the effect of those interests on the compromise or arrangement, if different from the effect on similar interests of other persons.

Ideally, in the explanatory statement the company should demonstrate the benefit of the proposed arrangement to the members or creditors affected, in contrast to a continuation of the existing situation and the presumably more significant attendant risks to those members or creditors.

If a majority in number representing 75% in value of the creditors or members (or relevant class), present and voting at the meeting, agree to the compromise or arrangement, then on application, the Court may sanction the scheme. An application for a sanction order must be filed by the company, any creditor or member, or a liquidator or administrator if applicable. Once sanctioned, the scheme of arrangement is binding on all creditors or members (or the class concerned) and the company, or a liquidator and contributories (if applicable).

Once issued, and in order to be legally effective, the sanction order must be filed with the Registrar of Companies, after which the company can proceed with implementation of the scheme.

Conclusion

For a company going through tough times, a scheme of arrangement presents an opportunity to reach a compromise or arrangement with creditors, whether through a conversion of debt to equity as was the case for Kenya Airways, or through any other genuine structure that will allow it the breathing space to focus on a return to profitability.

The beauty of a court sanctioned scheme is that as long as the required majority of designated creditors agree to it, the company can proceed with that arrangement without obtaining the approval of all relevant creditors. As a result, a company in distress may be able to avert insolvency proceedings and possible liquidation, which is often a ‘lose-lose’ outcome for all involved. Thus, given the unsecured status of the eleven banks to Kenya Airways, the incentive to agree to the airline’s scheme would seem clear. Moreover, a negative outcome for the airline would have extended beyond its creditors and shareholders, to affect critical sectors of Kenya’s economy such as tourism. Let’s hope that the Kenya Airways scheme of arrangement achieves the desired outcome and that other companies are inspired to consider schemes of arrangement as a potential solution to imminent disaster.

Article written by Suzanne Muthaura, Partner -MMAN Advocates

Disclaimer: This article has been prepared for informational purposes only and is not legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Nothing on this article is intended to guaranty, warranty, or predict the outcome of a particular case and should not be construed as such a guaranty, warranty, or prediction. The authors are not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Readers should take specific advice from a qualified professional when dealing with specific situations.