Recovery Strategy for a Stalled Default
A KES 25 million term loan to a transport company has been in arrears for seven months. The company has stopped communicating, the directors have moved the fleet to another yard, and the bank's security is a debenture over the company's assets plus a personal guarantee from the managing director. The bank has obtained a valuation showing the fleet is worth KES 30 million but is depreciating quickly and some vehicles may already be sold. A competing creditor has filed a winding-up petition. The bank's recovery unit estimates legal costs of KES 2 million and a twelve-month timeline to realise assets through court process. The managing director has offered to settle KES 15 million immediately in full and final settlement, funded by a relative.
1. Compare the recovery options available to the bank and recommend one, showing the financial reasoning.
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The bank must weigh a certain, discounted recovery against a larger but uncertain and slow one.
Option A - Enforce the debenture (appoint a receiver or pursue court realisation):
- Gross realisable value: up to KES 30 million, but the fleet is depreciating and some vehicles may be gone, so assume a haircut (say 20–30%) → KES 21–24 million.
- Less legal costs KES 2 million → KES 19–22 million.
- Discount for twelve months' delay at, say, 12% → present value roughly KES 17–20 million.
- Risk: the competing winding-up petition may stay enforcement, lengthen the timeline, and push the bank into a pari passu or subordinated position. Recovery could fall well below estimate.
Option B - Accept the KES 15 million settlement:
- Certain, immediate, no legal cost → present value KES 15 million.
- Loses the upside of up to KES 5–7 million but eliminates the downside risk of a contested insolvency.
Recommendation: The settlement is attractive only if the bank is confident the enforcement route yields materially more. Given the depreciating fleet, possible missing vehicles, the competing petition, and a twelve-month timeline, the realistic enforcement recovery (KES 17–20 million) is only modestly above KES 15 million, and the variance is wide. A negotiated uplift is the best play: counter at KES 18–20 million with a short deadline, and accept the KES 15 million only if the MD will not move and the legal risks are confirmed. Preserve the guarantee and take a written release only on receipt of cleared funds.
2. Explain the legal and practical safeguards the bank must build into any settlement.
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A settlement is only as good as its documentation and the certainty of funds.
Safeguards:
- Cleared funds first - the release and discharge of the guarantee and debenture must be conditional on receipt of cleared funds; no release on a promise.
- Written settlement agreement - setting out the amount, the source, the deadline, and that it is full and final only on payment. Include a clause that if funds fail, the bank's full rights revive.
- Preserve residual rights - reserve the right to pursue the personal guarantee and any other security if the settlement fails or is reversed (e.g., clawback in insolvency).
- Check for preference/clawback risk - a payment from a relative shortly before insolvency may be challenged; document the source and take legal advice.
- Coordinate with the winding-up petition - notify the court/petitioner as required and ensure the settlement does not prejudice the bank's position in the insolvency.
- Board approval - a discount from KES 25 million to KES 15 million is a loss; it must be approved under the bank's delegated authority and documented with the recovery rationale.
- Accounting - write off the shortfall and record the recovery correctly.
Conclusion: The settlement should be structured so the bank keeps its enforcement rights until the money is banked, and so the discount is properly authorised and documented.