The first case of coronavirus (COVID-19) was reported in Kenya on 13^th March, 2020 and with it came the disruption of Kenyan business on an unprecedented scale. Businesses have had to cut down on operations with many being forced to reduce operating costs, lay off workers, close down branches, among other measures. The snowball effect has been reduced liquidity in the economy as very few people can meet their day to day cash obligations. As Harry Truman once said “…It is a recession when your neighbour losses his job; it’s depression when you lose yours…” the adverse economic and financial effects of the pandemic are truly felt when they hit home. It is therefore imperative for businesses to not only tighten their financial and strategic belts by controlling their operational costs but also find creative ways of enhancing their liquidity.

In this alert, we consider the measures taken by the government to financially cushion corporate entities in this pandemic as well as corporate measures that companies may take to enhance their liquidity and ensure business continuity.

A. Corporate Measures

Debt Discounting

Debt discounting generally involves banks or financial institutions lending money with the deduction of interest or premiums in advance of the amount being received by the borrower. This would generally ensure that the institution recovers its interest in advance and at the same time allow borrowers easy access to liquid cash.

Factoring and Receivable Financing

Factoring and receivable financing transactions offer easier access to capital by corporate entities through the sale of receivables, invoices, and other highly traded commercial assets.

Factoring is a financial transaction in which an enterprise sells its account receivables to an entity at a discount to raise capital to run the enterprise.

Receivable financing, on the other hand, is a subset of factoring. It occurs when a business raises money or finance based on or from its receivables by offering the receivables as security for a loan. It is a tool used by businesses to obtain quick access to short-term financing while mitigating the risks related to payment delays and default by buyers.

Kenya does not have a specific legal framework that regulates factoring and receivable financing. Parties to factoring and receivable financing transactions rely on general principles of contract law and the Moveable Property Security Rights Act (No.13 of 2017) (MPSRA). Section 2 of the MPSRA recognises receivables as intangible assets over which security may be created to obtain a loan.

In the case of Trans National Bank Limited v Swift Truckers Limited & 3 Others [2012] eKLR the Court held that a receivable financing transaction is based on the contractual relationship entered between two parties, namely the factor and the supplier. The contract terms are negotiated by the parties and spell out the rights, obligations and conduct of the parties in the factoring agreement.

Receivable financing stands out as being a mode of financing that is within reach of Small and Medium Sized Enterprises (SMEs). This is due to the low levels of credit scores required to access finance thus promoting financial inclusion. Further, receivable financing improves the flow of cash to assist with the operations within the supplier’s business while eliminating bad debt. It is estimated that a company may access up to 80% of the invoice value from factoring without having to wait for the final payment period for invoices.

Finally, receivable financing may serve as an avenue of lowering a company’s tax liability by converting a supplier’s debtors (which is an asset) into security for achieving financing. The servicing of the finance serves as an additional expense for the supplier, effectively lowering their net profit thereby incurring a lower tax liability.

With the impending financial crisis, businesses may consider receivable financing, factor financing and debt discounting as possible avenues of boosting their liquidity.

New Creditors to Offer Facilities

Corporate entities may consider engaging other credit offering non- financial institutions offering debt discounting services to sustain their financial buoyance

Re-negotiation of Debt Repayment Terms

Following the flexibility of loan terms that is forthcoming, borrowers can negotiate methods through which they can service their debts. Extended loan repayment periods, payment-in-kind, scraping of penalties, or the interest rates can all be negotiated to prevent default whilst maintaining liquidity. Indeed, the Central Bank of Kenya (CBK) vide notices dated on 18^th Mach, 2020, on Emergency Measures To Mitigate The Adverse Economic Effects On Bank Borrowers From The Coronavirus Pandemic, formulated measures that were to apply for borrowers whose loan repayments were up to date as at 2^nd March, 2020. Notably, banking institutions were directed to consider renegotiating the debt repayment terms for their borrowers. Borrowers whose loans and other credit facilities were not in arrears as at the beginning of March 2020 should take advantage of this directive and renegotiate the terms of repayment in a manner that best suits their financial position subject to the banks’ acceptance of the renegotiated terms.

Sale of Non-Strategic Assets

Businesses may also consider selling certain non-strategic assets. This could guarantee a prompt boost of their liquidity. They may also renegotiate with their lenders so that the proceeds of these sales of assets (even where such assets act as the collateral) can be reinvested in the company’s main business activities rather than into the servicing of the existing facilities. Alternatively, the gains from the sale may be channelled towards structuring sales or purchases through collection or payment in kind (shares, exchange of assets, etc.) which would limit the outflow of cash and maximize the value of the corporate entities and its future activities.

B. Government Measures

Tax Reliefs

As discussed in our recent Alerts on Tax Reliefs and the Tax Amendments Act, 2020 the Government has taken fiscal measures aimed at cushioning Kenyans against the adverse economic effects of the COVID-19 pandemic, laid out various tax reliefs that would aid businesses to mitigate against the harsh economic times. These measures have been incorporated in the Tax Laws (Amendments) Act, 2020, and would aid in preserving liquidity as a result of lowered tax obligations. They include among others: the reduction of VAT from 16% to 14%, the lowering of the Central Bank Rate from 8.25% to 7.25% and further reduced to 7% which would aid borrowers and lenders; the reduction of the Turnover Tax rates for SMEs from 3% to 1%; the reduction of Corporate Tax from 30% to 25%; and the expedited payment of verified VAT refunds.

Central Bank of Kenya Directives

In an address to the Nation on 25^th March 2020, President Uhuru Kenyatta called for the lowering of the Cash Reserve Ratio (CRR) to 4.25 percent from 5.25 percent which would provide additional liquidity of Kenya Shillings Thirty Five Billion (KES 35 Billion) to commercial banks. As a result, borrowers have access to liquid capital for their businesses. The CBK rate has also been lowered to facilitate the ease of access to capital by borrowers. See the CBK’s Additional Emergency Measures to Mitigate the Adverse Effects on The Banking Sector from The Coronavirus Pandemic dated 20^th March, 2020.

There was also the temporary suspension of the listing with Credit Reference Bureaus (CRB) of any person, Micro Small and Medium Enterprises (MSMEs), and corporate entities whose loan account falls overdue or is in arrears. As a result, companies which would otherwise have not been creditworthy can remain afloat and solvent despite being generally high-risk borrowers.

Trading on the Capital Markets

The Capital Markets Authority (CMA) issued a Press Release dated the 3^rd of April, 2020, by the Capital Markets Stakeholders on “Capital Market industry announces measures to mitigate the adverse effects of the Corona pandemic” announcing a raft of measures to mitigate the impact of the virus on trading and the continuity of business.

Some of the measures include the sanction of Annual General Meetings of listed companies and making the procurement of all relevant approval, audited financial statements and dividend policies to the CMA, NSE and the public available through prescribed channels; ensuring that trading on the NSE can be carried out through online, mobile platforms or trading systems that can be accessed virtually and allow for automated customer onboarding processes to reduce the need for physical verification of documents and in-person visits while facilitating access to the market by investors.

It is hoped that these measure will see the markets remain open and accessible so that businesses can trade on highly liquid markets. Corporate entities trading on the market can, therefore, take advantage of liquid markets to make high returns.

This alert is for informational purposes only and should not be taken as or construed to be legal advice.

If you have any queries or need clarifications, please do not hesitate to contact Jacob Ochieng ([email protected]), Nelly Gitau, Lena Onchwari, Wanjala Opwora ([email protected])  or your usual contact at our firm, for legal advice relating to the COVID-19 pandemic and how the same might affect you.