Of The Company, By The Administrator, For The Creditors" – A Commentary Of The High Court Rulings Dated 6th January 2023 In The Cytonn Administration Proceedings

On 6^th October 2021, Cytonn Real Estate Project Notes LLP and Cytonn High Yield Solutions LLP applied to be placed under administration. At the time of the said application, CHYS disclosed that amounts contributed by various creditors amounted to Kes. 11,172,133,445.00. On the other hand, CPN claimed that its liabilities exceeded its assets by a sum of Kes. 388,118,413.00. Both companies sought an Administration order under Section 533 of the Insolvency Act, to give them a "breathing space for 'balance sheet restructure and preservation of the value' of their assets."While the two debtors are registered Limited Liability Partnerships , the provisions of the Insolvency Act on Administration of Companies equally apply to LLPs by virtue of Section 2 of the Insolvency Act which defines a “Company” to also include Limited Liability Partnerships. On 6^th October 2021, the Administration Orders were made, and Mr. Kereto Marima was appointed as an Administrator, as proposed by the company’s directors. Consequently, the Administrator took over the reins of both companies and was mandated to run the affairs of both companies and achieve the objectives laid out under Section 522 of the Insolvency Act, 2015 being: -

1. to maintain the company as a going concern;
2. to achieve a better outcome for the company's creditors as a whole than would likely to be the case if the company were liquidated (without first being under administration);
3. to realise the property of the company in order to make a distribution to one or more secured or preferential creditors.

Following the commencement of administration, the Administrator filed the relevant notices with the Companies registry and circulated the same among the known creditors of the companies. The Administrator contended that he also undertook the verification of claims by the creditors and that he issued a Statement of Proposals as required under the Insolvency Act proposing the liquidation of the companies.The Administration proceedings, however, came a cropper when on 19^th May 2022, the creditors of CPN and CHYS moved to Court for the removal of the Administrator. The application was brought up on the basis that since his appointment, the Administrator had not undertaken anything substantial in the Administration process and had failed to obtain relevant information about the companies.In his Rulings dated 6^th January 2023, Justice Alfred Mabeya found merit in both applications, terminated the administration proceedings, and placed the companies under Liquidation. The Court concluded that the creditor's interests had not been taken into consideration, and the Administrator had not performed his duties to the satisfaction of the Court.

What is the implication and take-home message from the Court's decision?

The concept of administration under the Insolvency Act was meant to give room for a company to regain its balance for an initial period of 12 months. The Act, however, provides for instances where the Administrator's term may be extended for a further specified period.In recent times, however, parties in Corporate Insolvency Litigation matters have witnessed Administration proceedings that seem to run perpetually to the detriment of the company and the creditor's interests. While in certain instances, orders for the extension of the Administrator's term are necessary to enable the Administrator to complete the process of administration, often, the delays in completing the affairs of the company within the 12 months can be attributed to laxity on the part of the critical stakeholders in the administration process.Some of the key takeaways from the Learned Judge's Rulings are as follows: -

1. In an application seeking the removal of an Administrator, the burden of proving that the Administrator is guilty of improper motive warranting his removal rests on the creditors seeking his removal;
2. What constitutes improper motive under Section 597 of the Insolvency Act, 2015 can be inferred from the actions and inaction of the Administrator;
3. Where the Administrator's actions fall short of the objectives under Section 522 of the Insolvency Act, 2015, an inference of improper motive can be made;
4. The Administrator must account to the creditors and the Court as to how much assets are in his control and possession and the steps he is taking to safeguard the interests of the creditors;
5. The Administrator has the power to take any action that is likely to contribute to the effective and efficient management of the affairs and property of the company under Administration. Failure to perform this duty satisfactorily is ground for the removal of an Administrator; and

In his dealings, an Administrator does not act in the interests of those who appointed him. The creditor's interests have to be taken into consideration.These Rulings buttress the position that while an Administrator takes over the reins of the company and has control over the affairs of the company, Administration proceedings are class actions, and the interests of the creditors have to be considered in every step. An Administrator cannot act in the interests of the promoters of the debtor to the detriment of the creditors. He has to consider the wider interests of the creditors as a whole.Please click here to download the alert.

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