The early stage of the distress cycle is when the company is underperforming but it has not run out of cash. At this stage the warning signs of insolvency include overtrading, high gearing, or declining service standards. In the case of Tuskys, it is reported that it was overtrading by using suppliers’ money to expand its business at a rate that could not be supported by its working capital. It was thus inevitable that its outstanding debts would outweigh its assets.

Brief background

Tusker Mattresses Limited operated a chain of supermarkets under the name of Tuskys Supermarket. On various dates during 2020 Tuskys was faced with three petitions by Hotpoint Appliances Limited, Rositalia Limited and Syndicate Agencies Limited (petitioners). The petitioners sought a liquidation order against Tuksys and the appointment of a liquidator to manage its affairs. The petitioners stated that despite several requests and demands, Tuskys had refused and/or neglected to pay its debts to them. Section 435 (1)(b) of the Insolvency Act gave the creditors the right to present a liquidation petition to invoke the powers of the court.

The court, in deciding whether to issue the liquidation order or not, focused on three main issues:

1. Whether Tuskys had been unable to pay its debts.
2. Whether Tuskys had any means or potential means of raising funds to warrant an extension of time to give it a lifeline.
3. The discretionary power of the court to decide on the liquidation.

In an effort to allow the company to rescue its operations, Tuskys had three years to restructure and figure out how to pay its debts after the first application by creditors. The company alluded to the existence of an external investor who was set to pump money in to revive the supermarket. The supermarket also claimed to have raised KES 37,5 million from the sale of its non-core assets to offset the debt owed to its creditors. Unfortunately, the outstanding debts and liabilities amounted to KES 4,5 billion, which significantly exceeded the amount raised. The court was therefore satisfied that Tuskys was unable to repay its debts and found that allowing it more time than the three years it had already been given would be unfair to the creditors.

In assessing the prospects of revival of the supermarket the court found that Tuskys failed to prove any viability of maintaining solvency and that after three years, there was no chance that things might change and therefore there was no reason to keep the creditors at bay. The court also noted that three years was sufficient time for a company to restructure and having already been given that time with no positive changes, the chances of any rescue prospects were thin.

In light of these findings, the court was guided by section 424 of the Insolvency Act, which allows it to liquidate a company if the company is unable to pay its debts. The court exercised its discretion after analysing the circumstances presented and carefully weighing the creditors’ rights and the company’s prospects of revival.

Lessons learnt

The liquidation may have been avoided if Tuskys had sought help to restructure its debts much earlier than it did. Business owners should pay attention to the early warning signs of insolvency. These can be grouped into three categories:

1. Operational – for example, overtrading, high gearing and declining service standards.
2. Financial – such as lack of financial control, failure to compare actual versus budget and take corrective action, and poor forecasting.
3. Management – for example, a domineering chief executive, an uninvolved board of directors, lack of focus on business risk management, speculation in the market, or investing in products away from core activity.

Once these signs appear it is important for business owners to seek an independent business review so that they can know whether the business is still viable. If it is viable, they can explore restructuring options with the help of financial and legal experts.