To Appoint A Receiver Or An Administrator – The Conundrum With Debentures Executed Pre-2015;

One of the hallmarks of the Insolvency Act is the introduction of the concept of Administration of companies to replace the receiver(s)/managers(s) under the Companies Act (Repealed) whose overall objective is to ensure that distressed companies are given “breathing space” so that they remain going concerns which was not available in receivership. Administration of insolvent companies is an alternative to liquidation and winding up under Part VIII of the Insolvency Act 2015 and Part IX of the Insolvency Regulations 2016. Once a company is unable to pay its debts, the Insolvency Act provides administration as a viable option that can keep the insolvent company as a going concern or achieve a better outcome for the creditors than would be possible if the company goes to immediate liquidation.

Receivership vis-vis administration

Before the enactment of the Insolvency Act, No. 17 of 2015, insolvency proceedings were governed by the Companies Act Cap 486 (Repealed) which provided for the appointment of receivers as opposed to administration. The said appointment could be done through either of the following ways: -

1. Appointment through the Court under Section 347; and
2. Appointment out of Court through debenture instruments under Section 348.

Appointment under the aforementioned Section 348 of the Companies Act, Cap 486 allowed a debenture holder to appoint a receiver or manager. Such a receiver/manager took over the reins of a company in the event of default with the sole intention of disposing of the assets upon which the loan facilities advanced were secured to recoup money for the appointing entity. As opposed to receivership, the primary objective of administration is to keep the company as a going concern which if not achievable, then the administration is intended at achieving the second objective being to achieve a better outcome for all the creditors. It is only where these two objectives are not achievable that the realization of the company’s assets in order to make a distribution to one or more secured or preferential creditors comes into play.

Appointment of an Administrator under Section 534 of the Insolvency Act;

The Insolvency Act, of 2015 did away with the appointment of receivers and introduced the appointment of administrators by holders of a qualifying floating charge in respect of a company's property. A floating charge is a qualifying floating charge if it is created by a document that—

1. states that Section 534 of the Insolvency Act applies to the floating charge; or
2. purports to empower the holder of the floating charge to appoint an administrator of the company.

For one to be eligible as a holder of a qualifying floating charge in respect of a company’s property, such a person has to hold one or more debentures of the company secured by a qualifying floating charge or several such charges, that relate to the whole or substantially the whole of the company's property.

To appoint an Administrator or not by holders of debentures predating the Insolvency Act?

Noting that the concept of administration was not available pre insolvency Act, 2015, debentures provided for the appointment of receivers as opposed to administrators. In this regard, since the inception of the Insolvency Act, of 2015, the Insolvency Court has been faced with the question of whether a debenture holder with a debenture predating the Insolvency Act, 2015, ought to appoint an administrator or a receiver as contemplated under the old regime having been done away with. In Re Arvind Engineering Limited eKLR, the Court formed the opinion that as there lies some commonality between receivership and administration, there was a need for a purposive interpretation of Section 534 of the Insolvency Act so as not to disadvantage debenture holders who hold debentures that predate the Act. The Court went on to hold that since the debenture instrument, in that case, empowered the Bank to appoint a receiver/manager whose powers are akin to that of an administrator, the Bank was a holder of a qualifying floating charge and therefore eligible to appoint an administrator. In Commercial Case No. E262 of 2020 Ponangipalli Venkata Ramana Rao & Another -vs- Sammy Muli Mutua & Another , the debenture holder had appointed a receiver under the provisions of the Companies Act Cap 486 (Repealed). The Court, in this case, held the appointment to be defective as it was based on a repealed law. The Court held the opinion that notwithstanding that the debenture predated the insolvency act, the Bank was a holder of a qualifying floating charge and therefore competent to appoint an administrator. In a differing decision by Mativo J. in I & M Bank Limited v ABC Bank Limited & another eKLR, the Court held that to appoint an Administrator without making an application to the court, the floating charge must meet either of the conditions set out in section 534, that is, it must state that section applies to it or empowers the holder to appoint an administrator. The Court found that a debenture pre-dating the Insolvency Act did not empower the Bank to appoint an administrator without making an application to Court for the following reasons: -

1. Section 520 of the Insolvency Act, 2015 ascribes a specific meaning to the term “administrator” and states that an administrator in relation to a company, means a person appointed … to manage the company’s affairs and property, and, if the context requires, includes a former administrator.
2. Although the functions of a receiver/manager may be conterminous with those of an administrator under the Insolvency Act, they cannot be equated to those of an administrator.
3. The power to appoint a receiver or receiver manager under a debenture predating the Insolvency Act cannot be equated to the power to appoint an administrator under section 534.
4. While an administrator is an officer of the Court, a receiver is not an officer of the Court.
5. Further, a receiver does not have the responsibilities and obligations to the general body of creditors, whether secured or unsecured and cannot be called upon to account as such but is an agent of the company or the debenture holder.

The Court held where a debenture does not state that section 534 of the Insolvency Act applies to it or empowers the holder to appoint an administrator, the debenture holder can only appoint an administrator by making an application to Court under Section 533 of the Insolvency Act. The said decision was appealed against at the Court of Appeal and is pending Judgment. The Court further noted that even though the Court’s finding was that the debenture holder could not appoint an administrator, this did not mean that the debenture holder was not entitled to appoint a receiver/manager under the debenture as the power is specifically preserved under the transitional provisions under section 734(2) of the Insolvency Act.

Conclusion

Notwithstanding that the transitional provisions of the Insolvency Act provide that the provisions of the Companies Act, Cap 486 pertaining to Insolvency proceedings continue to apply to the exclusion of the Insolvency Act to any past event, there exists a conundrum as to whether debentures pre-dating the insolvency act allow the appointment of an administrator under Section 534 of the Insolvency Act. We shall do a follow-up write-up on the decision rendered by the Court of Appeal on the said issue. However, given that a debenture instrument is a contractual document between a lender and a borrower, every debenture holder intending to enforce a debenture should seek counsel from their advocate on the most appropriate enforcement mechanism to protect their interests.Please click here to download the alert.

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