Zakhem International Faces Insolvency Suit Over Sh460 Million Debt in Kenya
Zakhem International Construction (Kenya) Limited, a prominent Lebanese-owned construction firm, is facing a critical financial challenge as the High Court in Nairobi hears an insolvency petition filed by Synergy Industrial Credit Limited. The creditor is seeking to liquidate Zakhem over an unpaid debt of Sh460 million (approximately $3.56 million), marking a significant escalation in the company’s ongoing financial disputes.
The insolvency suit stems from a financial agreement between Zakhem and Synergy Industrial Credit, where Synergy advanced a loan to Zakhem for operational purposes. According to court documents, Zakhem has failed to settle the debt, prompting Synergy to invoke Kenya’s Insolvency Act of 2015. The Act allows creditors to petition for liquidation if a company is unable to pay debts exceeding Sh100,000 after a 21-day written demand period. Synergy’s legal action follows Zakhem’s alleged default on the repayment terms, with the creditor arguing that the construction firm is insolvent and incapable of meeting its financial obligations.
Zakhem International, owned by Lebanese tycoon Abdallah Zakhem, is no stranger to high-profile projects and controversies in Kenya. The company was contracted by the Kenya Pipeline Company (KPC) to construct a Sh48 billion ($484.5 million) Mombasa-Nairobi oil pipeline, a project that has been mired in disputes over cost escalations and delayed payments. These earlier conflicts provide critical context for Zakhem’s current financial predicament.
Synergy Industrial Credit’s petition, filed before the High Court, seeks a court order to wind up Zakhem International and appoint an official receiver to oversee the liquidation process. The creditor claims that Zakhem’s failure to repay the Sh460 million debt demonstrates its insolvency, justifying the drastic measure of liquidation. Under Kenyan law, liquidation would involve selling Zakhem’s assets to settle outstanding debts, potentially terminating the company’s operations in the country.
The court has yet to deliver a ruling on the petition, but the case has drawn significant attention due to Zakhem’s prominence in Kenya’s construction sector. If the court grants Synergy’s request, it could set a precedent for other creditors to pursue similar actions against Zakhem, further jeopardizing the company’s operations.
The insolvency suit comes on the heels of Zakhem’s protracted legal and financial battles with the Kenya Pipeline Company. In 2019, Zakhem sued KPC for Sh13.26 billion ($128.8 million), alleging that the state-owned entity withheld payments for the Mombasa-Nairobi pipeline project. The firm claimed $67 million for unpaid work, $59.2 million for project delays, and $2.6 million in interest. The dispute arose after State House intervened, halting payments to Zakhem amid allegations that the pipeline’s construction costs had been inflated beyond the agreed Sh48 billion budget.
Zakhem argued that delays in the pipeline project were caused by KPC’s design amendments, a dispute over Sh240 million in regulatory fees to the National Construction Authority, and legal challenges to the contract award. Despite approvals from KPC engineers, executives, and the Attorney-General’s office, payments were frozen, leading to a bitter legal standoff. The controversy escalated when Zakhem’s Africa business head, Ibrahim Zakhem, declined to appear before a parliamentary committee, prompting threats of arrest from MPs.
In a related development, the Auditor General’s report for the year ending June 2023 revealed that Zakhem imposed a Sh3.03 billion penalty on KPC for delays in settling $44.02 million (Sh4.4 billion) related to four Extension of Time (EOT) claims. These penalties arose after KPC, following a Treasury directive, delayed payments pending investigations by the Directorate of Criminal Investigations and guidance from the Attorney-General. The non-settlement of these claims led to accumulating penalties, further straining Zakhem’s financial position.
The insolvency petition against Zakhem underscores the broader challenges facing Kenya’s construction and corporate sectors. According to the Office of the Official Receiver, petitions for company liquidations have surged, with 30 cases recorded in the 2023-24 fiscal year, up from 13 in 2015-16. This rise reflects the economic downturn and governance issues plaguing businesses, making it difficult for distressed firms to recover within the 18-month administration period stipulated by the Insolvency Act.
For Zakhem, a liquidation order could jeopardize its ongoing projects and erode its reputation in Kenya and beyond. The company’s history of contentious contracts, including allegations of being blacklisted in other countries during the pipeline tender process, may complicate its efforts to secure future deals. Moreover, the case highlights the risks faced by creditors like Synergy Industrial Credit, who may struggle to recover funds from financially distressed firms.
Legal and Economic Context
Kenya’s Insolvency Act of 2015 was designed to provide a framework for rescuing financially troubled companies through administration, with liquidation as a last resort. The Act aims to protect creditors while giving companies a chance to restructure and recover. However, as noted by legal experts, the rising number of liquidation petitions suggests that many firms are unable to overcome their debt burdens within the stipulated timeframe.
The Zakhem case also raises questions about the oversight of public-private contracts in Kenya. The Mombasa-Nairobi pipeline project, initially hailed as a critical infrastructure upgrade, has become a symbol of mismanagement and financial disputes. The intervention by State House and the Treasury in withholding payments to Zakhem, while aimed at curbing cost escalations, has inadvertently contributed to the company’s financial woes, potentially pushing it toward insolvency.
As the High Court prepares to hear Synergy Industrial Credit’s petition, all eyes are on Zakhem International’s next moves. The company may seek to negotiate a settlement with Synergy to avoid liquidation or request court protection under the administration provisions of the Insolvency Act. Such a move would grant Zakhem breathing space to restructure its finances and address its debt obligations. However, with mounting penalties from the KPC dispute and a tarnished public image, Zakhem faces an uphill battle to restore its financial stability. The outcome of the insolvency suit could have far-reaching implications for the company, its creditors, and Kenya’s construction industry, which continues to grapple with economic uncertainties. For now, stakeholders await the court’s decision, which will determine whether Zakhem International can weather this storm or become the latest casualty in Kenya’s rising tide of corporate insolvencies.