The implosion of once retail giant Nakumatt was huge and its effects were felt by many creditors, including banks, suppliers, and landowners.
One such creditor is plastic manufacturer Kenpoly Manufacturers Ltd, which suffered losses of more than Sh170 million after supplying products to the supermarket chain for several years in Kenya and its subsidiaries in Tanzania, Uganda, and Rwanda.
As an unsecured creditor, the firm tried pursuing its money but gave up after efforts to press for payment failed, even through the courts. The firm said it ended up incurring more losses through court processes.
The company eventually gave up and wrote off the money as bad debts and deducted the amount in the tax period from January 2016 to December 2019.
The company was to get a shocker after the Kenya Revenue Authority (KRA) disallowed the claim for bad debts and raised an additional amount of Sh55 million after reviewing the company’s assessment, in a letter dated May 26, 2021.
Kenpoly Ltd moved to the tax appeals tribunal after efforts to resolve the matter were unsuccessful. It argued that the KRA decision to disallow the claim was incorrect and discriminatory.
The company got its way after the tribunal ruled that KRA was not justified in rejecting the claim for bad debts.
“Consequently, the Tribunal finds that the Respondent was not justified in its decision to disallow the Appellant’s claim for bad debts against its supplies to Nakumatt Holdings Limited and in the issuance of the subsequent tax assessment,” the tribunal chaired by Eric Wafula ruled.
In the tribunal, the company stated that KRA was wrong in its interpretation of Section 15 of the Income Tax Act, by disallowing the bad debts claim, even after fulfilling the conditions set by The Bad Debt Guidelines.
Nakumatt Holdings Limited (NHL) was placed under administration in January by the High Court after insolvency proceedings were filed against the company.
The plastic manufacturer told the tribunal that it was informed that assets of NHL available were Sh3.8 billion against secured creditors of Sh5.9 billion a clear indication that some of the secured creditors would be unable to recover their debt, let alone the unsecured creditors.
According to Kenpoly, secured creditors (mostly banks) would be much higher in priority in receiving the sums owed to them.
The firm said it made attempts to amicably settle the matter with NHL before moving to court.
The chain was forced to close down dozens of outlets from 2017 as it struggled to repay its suppliers, landlords and other creditors.
One of the branches, Ukay, was demolished by the government for encroaching riparian land.
Regulatory filings indicate that Nakumatt owed DTB Bank Sh3.6 billion, Standard Chartered Sh900 million, KCB Sh1.9 billion, Bank of Africa Sh328 million, UBA Sh126 million, and GT Bank Sh104 million.
Rejected the claim
The manufacturer said KRA rejected the claim, saying the firm did not prove to the Commissioner that the debts had become uncollectable after taking steps.
Further, the firm said KRA argued that NHL had not been found bankrupt or legally insolvent by a court of law.
The firm told the tribunal that a section of the Bad Debt Guidelines states that, “A debt shall be considered to have become bad if it is proved to the satisfaction of the Commissioner to have become uncollectable after all reasonable steps have been taken to collect it”.
The tribunal heard that Kenpoly made efforts to collect the debt in several ways.
In Uganda, for example, the firm filed a recovery suit but ended up incurring legal costs and recovered nothing.
The firm said Nakumatt Uganda Ltd (NUL) was placed under receivership on October 19, 2017, by the High Court’s Civil Division decision and allowed shareholders to appoint a receiver.
In Kenya, the manufacturer said it made several attempts to recover the debt, including sending demand letters, demand notices, telephone calls, and several visits to the NHL accounts office that failed to bear fruit.
It received cheques of Sh30.6 million which were later recalled by NHL in a letter on June 20, 2017 due to the fact that they were becoming stale and there was a high likelihood they would not be paid out.
After hitting a snag, the firm filed a claim with the court-appointed administrator Peter Kahi and when it became clear that NHL and its subsidiaries could not honour its financial obligations, it wrote off its debts as it had no form of secured debt with the former retail giant and its subsidiaries.
The KRA opposed the case, arguing that Kenpoly failed to satisfy the commissioner of domestic taxes and that it had exhausted all the avenues available to it.
According to KRA, the manufacturer simply filed a suit in Uganda but had not demonstrated that it pursued the same to its logical conclusion by obtaining judgment and enforcing the decree.
The taxman was of the view that had the manufacturer pursued the matter to the end, it could have obtained a decree and would have been considered together with the secured creditors.
In Kenya, KRA said the firm did not put in enough effort to the satisfaction of the taxman other than issuing demand letters.
Further, KRA said the taxpayer should have moved to court and obtain judgment in its favour which it could have enforced against any person who was owing Nakumatt or for consideration when the secured creditors were considered.
The tribunal, however, agreed with the manufacturer and allowed the appeal.
“On the basis of the foregoing analysis, the Tribunal determined that the Appeal is merited,” the tribunal said.
