KQ, Uchumi’s decline to zero net worth puts CMA on the spot

At least four companies listed on the Nairobi Securities Exchange (NSE) are insolvent, nearing insolvency or have a negative working capital, putting the Capital Markets Authority (CMA) on the spot over their continued trading at the bourse.

National carrier Kenya Airways tops the list having chalked up liabilities in excess of its assets while at Uchumi Supermarkets the difference between assets and liabilities has consistently deteriorated in the past 12 months in tandem with reported negative financial results.

National Bank of Kenya has also moved perilously closer to the margins having accumulated liabilities of S04 billion against S18 billion assets, leaving it standing just S.5 billion away from insolvency � which may be a single transaction or a few loans. The bank’s assets to liabilities difference deteriorated to S.5 billion in September from S3.3 billion in June.

Express Kenya, which reported a negative cash flow at the end of the last financial year, is also on the edge. The company was at the end of June left with a negative working capital of Sh40 million and was in a similar position to the tune of Sh50 million at the end of December last year.


The CMA is on the spot because the capital markets law empowers it as the regulator to take action against listed firms with slim chances of recovery from losses, insolvency and negative working capital to protect investors, financiers, suppliers and employees.

Analysts said the logical thing for the regulator to do was to suspend a company from trading on the NSE once its net-worth has dropped to zero, meaning it has become a liability to the owners.

Such action is followed by the regulator asking the directors and the management of such companies to table before investors proposals on how they plan to recover with specific milestones. The alternative is to ask the companies to go into voluntary receivership or bankruptcy.

Suspension of an insolvent companies from the NSE or the slipping of such a company into bankruptcy would give it time to assess the possibility of getting back to business or should in fact be liquidated to save owners from further losses.

Where a company has a negative working capital it should show how it will do business in the next one year.

Analysts also said it was unethical for directors and management to continue running an organisation they have reason to believe is facing serious hurdles in doing business, thereby giving false hopes to investors, employees, supplies and financiers.

In countries like Germany drastic plans aimed at reviving companies in such distress, including staff retrenchment, must be made public early enough.

In Germany, it is illegal to continue to operate a company that is technically insolvent. The directors and management are assumed to know this and should take action immediately when that point is reached. In fact they should be calling in lawyers for aice because they could be held personally liable by the company’s stakeholders, said Antony Muthusi, a partner for transaction and aisory services at audit and financial consulting firm Ernst and Young.


Mr Muthusi said technical insolvency means that a company is in distress and it is upon the directors to take care of the interests of employees, suppliers and financiers.

The CMA did not respond to questions on what actions it could take against financially distressed and insolvent firms that are trading at the Nairobi bourse. One senior manager, who is not authorised to speak on behalf of the organisation, said the regulator did not want to put itself in an awkward situation by speaking on an issue that has persisted for months without regulatory action.

We know issues of insolvency are weighty but no one wants to fix themselves on this one. You don’t know how the market will respond should there be word from the regulator that all is not well here, said the source.

Faith Waitherero, a research analyst at the Nairobi-based Standard Investment Bank, said the financial situation at Kenya Airways and the National Bank had worsened because the government was yet to put in more capital as expected.

There is a lot of uncertainty over KQ because we don’t know when cash will be injected into the firm, said Ms Waitherero.

At NBK, the need for capital arises from the strained ratios of liquidity standing at 21.1 per cent against a legal requirement of 20 per cent, leaving a headroom of only 1.1 per cent. The total capital to total risk-weighted assets � which is a measure of the extent to which capital covers possible loan losses � is also near the limit standing at 15.4 per cent against a requirement of 14.5 per cent, leaving a narrow gap of 0.9 per cent. Parliament rejected the Treasury’s plans to inject new cash into the bank, leaving it in a difficult position.

The Treasury had initially proposed to pump Sh4.9 billion into the bank through a rights issue intended to raise S3 billion.


The government owns 22.5 per cent of NBK and is the second largest shareholder after the National Social Security Fund, which has a 48 per cent stake. The reason for rejection of the proposal was not made clear.

Patrick Ngumi, the CEO of Institute of Certified Public Accountants of Kenya, which has been at the forefront of the campaign for good corporate governance and accountability, did not respond to queries on the matter.

Mr Muthusi said that once a company falls into insolvency, the best thing to do is to allow it to fall into receivership to sort out the problems or liquidate it.

Once you start making losses it eats into capital and insolvency becomes end result unless there is some intervention. An insolvent company is no longer owned by shareholders � as it might legally appear � but in fact by creditors, said Mr Muthusi, adding that many firms collapse because of corporate governance rather than market failure.

The board and management normally know at least two years in aance that a company is in some difficulties. That is why they are responsible for whatever happens. They can be sued for not properly notifying stakeholders. Again you shouldn’t be trading on the stock exchange if you are bankrupt.

Ms Waitherero said the regulator should protect investors by suspending a financially distressed company till they put their house in order. When you see the problems are a bit extended and not a one-off the good this is to suspend the company from trading, said Ms Waitherero.