[2022] KEHC 234 (KLR)

B N Kotecha & Sons Limited v Patel & 4 others (Insolvency Cause E038 of 2021) [2022] KEHC 234 (KLR) (Commercial and Tax) (18 March 2022) (Ruling)

Neutral citation: [2022] KEHC 234 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Insolvency Cause E038 of 2021

A Mshila, J

March 18, 2022

Between

B N Kotecha & Sons Limited

Debtor

and

Manharbhai Radjibhai Patel

1st Creditor

Devesh Manharbhai Patel

2nd Creditor

Bhavinkumar Manharbhai Patel

3rd Creditor

Sajni Shah

4th Creditor

Daxaben Manharbhai Patel

5th Creditor

Ruling

1. IntroductionThere are two applications filed herein and directions were given that the applications be canvassed together.

2. The 1st application is a Notice of Motion dated 22nd July 2021 premised under Regulations 16, 17, 77 and 78 of the Insolvency Regulations 2016, and Sections 17 and 384 of the Insolvency Act. The application was supported by the grounds on the face of it and the sworn Affidavit of Hemal Kishor Kotecha in which he sought the following orders that;a.The Statutory Demand from the Respondent’s dated 15th June 2021, lodged before the Deputy Registrar on 23rd June 2021 and served upon the Applicant on 2nd July 2021 be set aside.b.The Court do issue an order restraining the purported creditors/respondents herein from proceeding to file the purported intended petition and advertising the intended insolvency petition.

3. He stated that the Respondents herein served the said purported statutory demand upon the Applicant, and without the leave of the court, they went forth and published the same in a newspaper of national circulation, Daily Nation on 1st July 2021. They went further and sponsored a publication of the same in another newspaper of national circulation, the Standard, on 2nd July 2021.

4. The debt is disputed for reasons that;a.The 1st Respondent, Manharbhai Radjibhai Patel, had been overpaid by a sum of Kshs.73, 641,715 with the understanding that he would transmit the overpaid sums to his son who had also advanced some money to the Applicant;b.There was no timeline set as to when the borrowed amounts were to be recovered. The debt is thus yet to crystallize; andc.There was no agreement on any interest. The demand for the exorbitant interests by the respondents is thus a figment of their imaginations, and hence substantively disputed.

5. Further,the purported statutory demand is fundamentally defective. The same was issued by multiple creditors contrary to Section 384 of the Insolvency Act.

6. The respondents opposed the application vide a Replying Affidavit dated 19th August 2021 and stated that according to the contents of the Statutory Demand the Debtor has only repaid the sum of Kshs.22, 936, 500. 00 and not Kshs.25, 300, 000. 00 as alleged. The outstanding amount is therefore Kshs.7, 641, 969. 54.

7. The Debtor's admission of part repayment of the debt is prima facie proof that the debt was due and owing by the time it made the first repayment in November 2015 thereby buttressing the Respondents’ contention that the same was due by 15th November 2015. The debtor thereafter made sporadic payments in settlement of the debt up until May 2019.

8. The 2nd application is the Respondents’ Notice of Motion Application dated 19th August 2021 brought under Sections IA, 1B, 3A of the Civil Procedure Act, Orders 45 Rule I and 51 Rule of the Civil Procedure Rules. The application was supported by the grounds on the face of it and the sworn Affidavit of Bhavinkumar Manharbhai Patel and the Respondents sought the following orders;a.The Court to review, vary, set aside and/or discharge its orders issued on 4th August 2021 pending inter partes hearing of this Application.b.The Court to review, vary, set aside and/or discharge its orders issued on 4th August 2021.

9. The Applicants/Creditors stated that out of the principal debt of Kshs.96, 578, 469. 54 the debtor/respondent has since repaid the sum of Kshs.25, 300, 000. 00 only leaving an outstanding balance of Kshs.73, 641, 969. 54.

10. The Creditors are therefore within their legal right to issue a Statutory Demand to the Debtor. The said Statutory Demand was duly prepared and signed by the Creditors’ Advocates herein as their duly authorized agents and lodged in the High Court and signed by the Deputy Registrar on 23rd June 2021.

11. The said Statutory Demand was served on the Debtor by way of public advertisement in the Daily Nation Newspaper of 1st July 2021 and physically at its offices in Kisumu on 2nd July 2021. Applicant’s Case

12. The Applicant submits that the application to set aside the statutory demand was made within 21 days. The Creditors/Applicants acknowledge at Paragraph 26 of their Replying Affidavit that they served the purported demand on 2nd July 2021. They however contend that the statutory timeline expired on 22nd July 2021. A simple arithmetic calculation would show that the 21 days’ window closed on 23rd and not 22nd as alleged by the Creditors/Applicants.

13. The Debtor's prayer to set aside the Statutory Demand was not sought as an interim prayer which indicates that the Debtor was aware that such a substantive prayer can only be granted after inter partes hearing of the Application. In drafting the said Application, the Debtor's Advocates were themselves cognizant of the Creditors' right to be afforded an opportunity to be heard in reply to their application. It therefore follows that after grant of the order of stay of the Statutory Demand, the court's directions for inter partes hearing of the Application was blatantly inconsequential and an academic process.

14. The court is no doubt well versed with powers to set aside orders issued ex parte under Order 51 Rule 15 of the Civil Procedure Rules. The jurisdiction of the court to review or set aside its decisions is wide and unfettered as was held in the case of Shah v Mbogo and Another ]1967] EA 116

15. As submitted above, the impugned order setting aside the Statutory Demand essentially discounted the Creditors' claim for the Debtor's indebtedness. The order if not varied, set aside and/or discharged, greatly prejudices the Creditors as the Insolvency Proceedings stand quashed owing to the impugned order.

16. The Debtor does not stand to suffer any prejudice if the court sets aside the order setting aside the Statutory Demand to pave way for inter partes hearing of the Debtor's Application in which event the validity of the Statutory Demand would be determined.

17. On the contrary, it is the Creditors who have been greatly condemned unheard. Even with the directions for inter partes hearing, the only prayer pending for determination in the Debtor's Application is for an order restraining the Creditors from proceeding to file the intended Insolvency Petition.

18. It is a mandatory pre-requisite for a Creditor to demonstrate that there exists a valid Statutory Demand (that has not been set aside) at the time of filing an Insolvency Petition pursuant to Section 384 of the Insolvency Act. In the instant case, this Court having set aside the Statutory Demand, the Creditors are therefore precluded from filing an Insolvency Petition. Therefore, the pending prayer "an order restraining the Creditors from proceeding to file the intended Insolvency Petition" is by operation and implication of the impugned order granted, which means that there is no substantive prayer left for determination in the Debtor's Application.

19. Had the Creditors been afforded an opportunity to be heard before the Statutory Demand was set aside, and considering the overwhelming evidence in proof of the debt and the inability of the Debtor to settle the same, the Court would not have issued such orders. Accordingly, as a result of the impugned order, the Creditors stand to suffer insurmountably in the sum of Kshs. 73 641 969. 54 which continues to accrue interest with each passing day.

20. Whereas the Insolvency Act, 2015 as read with the Insolvency Regulations, 2016 and the Insolvency (Act) Amendment Regulations, 2018 make provision for setting aside a statutory demand issued under bankruptcy proceedings, no such provision has been made in relation to statutory demands issued pursuant to liquidation of companies.

21. The law has not clothed the Court with any powers to set aside a demand served upon a Debtor company pursuant to the process of liquidation of companies. The court cannot therefore with respect arrogate itself such jurisdiction or purport to exercise such discretion outside the limits of the law.

22. This position was upheld by Hon. Lady Justice W. A. Okwany in the case of Kwale International Sugar Company Limited vs. EPCO Limited & 2 others (2020) eKLR where the court dismissed an application to set aside a statutory demand filed against a company.

23. No injustice will befall the Debtor if this court upholds the validity of the Statutory Demand. The Creditors are in a precarious position as they continue to suffer financial loss every passing moment that the debt remains unpaid. The Creditors are apprehensive that if the Debtor's Application is allowed as prayed, they may never recover the colossal sums of money owed.Respondents’ Case

24. The Respondents submitted that the court erroneously and/or inadvertently set aside the Creditor's Statutory Demand dated 15th June 2021 vide its orders given on 4th August 2021.

25. Commencing Insolvency Proceedings is one of the ways provided under the law of recovering a debt owed by a Debtor. In commencing the said proceedings, where a Creditor is in reasonable belief that a Debtor is completely unable to pay its debts when they accrue and therefore seeks the intervention of the court to have the Debtor's assets liquidated and used to settle the debt.

26. In the instant case, the court unfortunately in what comes out as an inadvertent error or mistake, set aside the Creditors' Statutory Demand dated 15th June 2021 at the preliminary stage (ex parte) which in effect conclusively put an end to the Creditors' debt recovery process even though it is proved that Debtor was unable to settle the same.

27. The Debtor's prayer to set aside the Statutory Demand was not sought as an interim prayer which indicates that the Debtor was aware that such a substantive prayer can only be granted after inter partes hearing of the Application. In drafting the said Application, the Debtor's Advocates were themselves cognizant of the Creditors' right to be afforded an opportunity to be heard in reply to their application. It therefore follows that after grant of the order of stay of the Statutory Demand, the court's directions for inter partes hearing of the Application was blatantly inconsequential and an academic process.

28. Further, the Respondents argued that the court is no doubt well versed with powers to set aside orders issued ex parte under Order 51 Rule 15 of the Civil Procedure Rules.

29. The legal threshold to consider before exercising the said discretion is whether the party has demonstrated a sufficient cause warranting the setting aside of the ex-parte decision or proceedings. In the case of Wachira Karani v Bildad Wachira [2016] the court held;“Sufficient cause is a question of fact and the court has to exercise its discretion in the varied and special circumstances in the case at hand. There cannot be a straight-jacket formula of universal application.”

30. The impugned order setting aside the Statutory Demand essentially discounted the Creditors' claim for the Debtor's indebtedness. The order if not varied, set aside and/or discharged, greatly prejudices the Creditors as the Insolvency Proceedings stand quashed owing to the impugned order.Issues For Determination

31. After considering the Applicant’s Application, the response and the written submissions the following are the issues for determination;a.Whether the Debtor/Applicant has satisfied the conditions for issuance of restraining orders;b.Whether the creditors have satisfied the conditions for setting aside or review of the Orders issued on 4/08/2021. AnalysisWhether the debtor/applicant has satisfied the conditions for issuance of restraining orders;

32. The Applicant/ debtor had sought that the statutory demand dated 15th June 2021 be set aside. And this was dealt with by the Hon. Lady Justice Muigai when the court issued the order dated the 4th August, 2021.

33. The Debtor/Applicant contends that the Creditor/Respondents without leave of court went forth and published the same in the Daily Nation of 1st July, 2021 and made a further publication in the Standard Newspaper of 2nd July, 2021; and therefore the Applicant/Debtor therefore sought restraining orders against the Respondent/Creditors.

34. So the only issue left to be addressed in this 1st application is whether an order restraining the purported creditors/respondents herein from proceeding to file the purported intended petition and advertising the intended insolvency petition is merited.

35. Before addressing this issue this court will first address the 2nd application in which the creditor/applicants seek to review, vary or set aside the order of 4/08/2021. Whether the creditors have satisfied the conditions for setting aside or review of the Orders issued on 4/08/2021;

36. Starting off with addressing the issue of setting aside of the Order issued on 4/08/2021; the Creditors contend that if the impugned order is not varied, set aside and/or discharged, it will greatly prejudice them as the Insolvency Proceedings stand quashed and it in effect conclusively puts an end to the Creditors' debt recovery process.

37. As set out in the case of Shah v Mbogo and another ]1967] EA 116, the jurisdiction of the court to set aside its decisions is wide and unfettered. In this instance before setting aside the Order it is incumbent upon this court to investigate whether there exists a valid Statutory Demand that was served upon the debtor by the creditors.

38. This court makes reference to the applicable law found at Section 384 (1) Insolvency Act [also Regulation 77b of Regulations 2016] which provides a good guide on who can issue and the circumstances under which a valid statutory demand notice can be issued. It provides:-“The circumstances in which a company is unable to pay its debts(1)For the purposes of this Part, a company is unable to pay its debts—(a)if a creditor (by assignment or otherwise) to whom the company is indebted for hundred thousand shillings or more has served on the company, by leaving it at the company’s registered office, a written demand requiring the company to pay the debt and the company has for twenty-one days afterwards failed to pay the debt or to secure or compound for it to the reasonable satisfaction of the creditor;(b)if execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or(c)if it is proved to the satisfaction of the Court that the company is unable to pay its debts as they fall due.(2)A company is also unable to pay its debts for the purposes of this Part if it is proved to the satisfaction of the Court that the value of the company’s assets is less than the amount of its liabilities (including its contingent and prospective liabilities).

39. The law requires the Statutory Notice be issued by a creditor and the creditor is defined under Section 2 of the Insolvency Act as:“….a person entitled to enforce a final judgment or final order.”

39. The definition of a creditor is singular and does not include an agent, such as an advocate; in this instance upon the facts before this Court, the creditor(s) would be any of the persons named in the Title to these pleadings namely either Manharbhai Radjibhai Patel, Devesh Manharbhai Patel, Bhavinkumar Manharbhai Patel, Sajni Shah Or Daxaben Manharbhai Patel;

40. In the case of Blueline Properties Limited V Mayfair Insurance Company Ltd[2019] eKLR the court held thus:“38. Before concluding my discussion, I need to address the submission of Mayfair that the statutory notice served upon it by Blueline’s Advocate was null and void. Mayfair relied on Section 384 (1) (a) of the Insolvency Act and submitted that the Statutory Notice should have been issued by Blueline. That Section provides:“For the purposes of this Part, a Company is unable to pay its debts-a.If a creditor (by assignment or otherwise) to whom the Company is indebted for hundred thousand shillings or more has served on the Company, by leaving it at the Company’s registered office, a written demand requiring the Company to pay the debt and the Company has for twenty –one days afterwards failed to pay the debt or to secure or compound for it to the reasonable satisfaction of the creditor.”That Section requires the Statutory Notice to be issued by a creditor. A creditor is defined under section 2 of that Act as: “includes a person entitled to enforce a final judgment or final order.”That definition does not include an agent, such as an advocate. A creditor on the facts before Court would be Blueline, not its advocate. It follows, as rightly submitted on behalf of Mayfair, that the Statutory Notice issued to Mayfair did not meet the threshold set out in Section 384 (1) (a) of Insolvency Act. Blueline was therefore not entitled to rely on the Statutory Notice issued by its advocate to seek liquidation of Mayfair. It follows that without that Statutory Notice Blueline is unable to prove that Mayfair is unable to pay its debts.”

41. Upon perusal of the Statutory Demand dated 15th June 2021 it is noted that it is signed by the Creditor’s Advocates namely M.M.Gitonga LLP and going by the definition the advocate is not a creditor and can only be deemed to be the agent of the creditors. The Notice served upon it by the creditors advocate is therefore found to be contrary to statute and found to be defective.

42. This court is satisfied that there are no valid reasons to set aside the Order of 4/08/2021 which would in effect reinstate a defective Statutory Demand and not invalid and incapable of mounting up a petition for the liquidation of the debtor/company;Whether the creditor/applicants have satisfied the conditions for review of the Orders made on 4/08/2021

43. The Applicant in this 2nd Application sought to have the orders of 4th August 2021 reviewed. This court makes reference to the applicable law which is found at Section 80 of the Civil Procedure Act and Order 45 Rule 1 of the Civil Procedure Rules;

44. Section 80 of the Civil Procedure Act reads as follows;“Review:Any person who considers himself aggrieved: -(a)by a decree or order from which an appeal is allowed by this Act, but from which no appeal has been preferred; or(b)by a decree or order from which no appeal is allowed by this Act,may apply for a review of judgment to the court which passed the decree or made the order and the court may make such order thereon as it thinks fit.”

45. Order 45 of the Civil Procedure Rules, 2010 is also very explicit that a court can only review its orders if the following grounds exist: -(a)There must be discovery of a new and important matter which after the exercise of due diligence, was not within the knowledge of the applicant at the time the decree was passed or the order was made; or(b)There was a mistake or error apparent on the face of the record; or(c)There were other sufficient reasons; and(d)The application must have been made without undue delay.

46. The pertinent issue for determination herein, therefore, is whether the Appellant has established any of the above grounds to warrant an order of review. The first ground provides that there must be discovery of new and important matter which after the exercise of due diligence, was not within the knowledge of the applicant at the time the decree was passed or the order was made.

47. In the case of Evan Bwire versus Andrew Aginda Civil Appeal No. 147 of 2006 cited in the case of Stephen Githua Kimani versus Nancy Wanjira Waruingi T/A Providence Auctioneers (2016) eKLR the Court of Appeal Held as follows:“An application for review will only be allowed on strong grounds particularly if its effect will amount to re-opening the application or case afresh. In other words, I find no material before me to demonstrate that the applicant has demonstrated the existence of new evidence which he could not get even after exercising due diligence.”

48. There is no material placed before this court by the creditor/applicants to demonstrate the existence of new material or evidence which the creditors could not get even after exercising due diligence. Further to the above, the applicants have not demonstrated that there was a mistake or error apparent on the face of the record that warrants a review of the Order. The Applicant/creditors are found to have failed to provide any strong grounds for review;

49. Consequently, the only order which commends itself to this court is that the Order of 4/08/2021 setting aside the Statutory Demand remains in force. In this regard any Statutory Notice issued cannot be utilized to mount up a petition for the liquidation of the debtor company; which in effect compromises the application seeking for restraining orders; and this court opines that it need not belabor itself in addressing the issue as to whether the debtor/applicant has satisfied the conditions for granting restraining/injunctive orders.Findings and Determination

50. For those reasons this court makes the following findings and determination;i.The 2nd application dated 19th August 2021 for review, variation and setting aside is found to be devoid of merit and it is hereby dismissed with costs to the Debtor/Respondent;ii.The Order dated 4/08/2021 setting aside the Statutory Demand remains in force; The 1st application dated 22nd July, 2021 is therefore compromised.Orders accordingly.

DATED, SIGNED AND DELIVERED ELECTRONICALLY AT NAIROBI THIS 18THDAY OF MARCH, 2022. HON. A. MSHILAJUDGEIn the presence of;Miss Bundi holding brief for Mr. Gitonga for the creditorsMakokha for the debtorLucy--------------------Court Assistant