[2022] KEHC 9930 (KLR)

Big Cold Kenya Limited v Afro-American Food Company Limited (Insolvency Petition E058 of 2021) [2022] KEHC 9930 (KLR) (Commercial and Tax) (14 July 2022) (Ruling)

Neutral citation: [2022] KEHC 9930 (KLR)

Republic of Kenya

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

Commercial and Tax

Insolvency Petition E058 of 2021

WA Okwany, J

July 14, 2022

Between

Big Cold Kenya Limited

Petitioner

and

Afro-American Food Company Limited

Respondent

Ruling

1. On 13th December 2019, the parties herein entered into a Service Level Agreement wherein the Petitioner was to provide the Respondent with procurement, import, clearance, customs, transport, storage and handling of certain products at controlled temperatures.

2. The parties thereafter had a disagreement over payments for the said services and the Petitioner filed the instant Liquidation Petition seeking to liquidate the Respondent on account of an alleged outstanding debt of Kshs 9,682,402. 33.

3. The Respondent filed the application dated 20th September 2021 that is the subject of this ruling. Through the said application, the Respondent seeks the following orders:-1. Spent.2. Spent.3. That the Statutory Demand dated 30th June 2021 issued by the Petitioner against the Respondent under Section 384 of the Insolvency Act No. 18 of 2015 and Regulation 77B (2) (a) of the Insolvency Regulation, 2016 be struck out or set aside.4. That the Liquidation Petition dated 9th August 2021 and filed in court on 19th August 2021 arising out of the aforesaid Statutory Demand and filed under Section 425 of the Insolvency Act No. 18 of 2015 and Regulation 77B (1) (a) of the Insolvency (Amendment) Regulation, 2018 be struck out for being an abuse of the court process.5. That the cost of the Liquidation Petition and the present application be awarded to the Respondent.

4. The application is supported by the affidavit of the applicant’s Financial Controller Mr. Ashwani Kadanga who states that:-1. That the Petitioner is seeking an order for the liquidation of the Respondent on account of an alleged outstanding debt of Kshs 9,682,402. 33 allegedly owed to the Petitioner by the Respondent, and arising from a service level agreement dated 13th December 2019 between the Petitioner and the Respondent.2. That the aforementioned sum of Kshs 9,682,402. 33 allegedly owed to the Petitioner and on which the present petition is based is utterly false and lacks any legal or factual basis whatsoever, therefore rendering the current proceedings fundamentally defective and irregular. According to my understanding, the sum Kshs 9,682,402. 33 is broken down to Kshs 9,521, 565,08 for alleged goods ordered by the Respondent and Kshs 160,837. 25 for illegal interest on the alleged outstanding amount.3. That the alleged Statutory Demand dated 30th June 2021 that gave rise to the said petition was not served on the Respondent or its directors and in any event, for the reasons aforesaid and for the reasons stated hereinafter, it is a nullity as there is no such debt owed to the petitioner by the Respondent.4. That the Petitioner has to dated only issued two invoices to the Respondent being invoice No. 2388 in the sum of Kshs 64,334,90 dated 27th January and invoice No. 2389 in the sum of Kshs 96,502. 35 dated 29th January 2021. These invoices have been duly paid by the Respondent(Annexed herewith and marked “AK-2” is a copy of cheque No.xxxx and cheque No. xxxx towards the payment of invoice No. 2388 and invoice No, 2389, respectively).5. That the procedure followed by the Respondent when ordering for goods from the Petitioner was through a system-generated local purchase order sent from the Respondent to the Petitioner. Thereafter, upon receipt of the local purchase order, the Petitioner would source for the goods ordered in the local purchase order and issue an invoice which would also serve as a delivery note.6. That the Respondent has not in its lifetime ordered goods or issued a local purchase order to Petitioner amounting to a sum as gross as the Kshs 9,521,565. 08 quoted in an alleged invoice No. 2434. The Respondent has also never received the goods, the subject of the said invoice. Consequently, the said invoice No. 2434 in the sum of Kshs 9,521,565. 08 is a scheme by the petitioner to extort money from the Respondent and ultimately, unjustly enrich itself by means of this Petition.7. That for the avoidance of doubt, the Respondent has never received any invoice No. 2434 amounting to Kshs 9,521,565. 08 from the Petitioner and no evidence has been tendered or adduced by the Petitioner of how the said transaction took place to warrant the Statutory Demand dated 30th June 2021 and institution of the insolvency proceedings against the Respondent. I further once more that no goods worth the amount of Kshs 9,521,565. 08 have been received by the Respondent from the Petitioner.8. That in any event and without prejudice to the foregoing, the respondent’s average monthly consumption of the beef patties supplied by the Petitioner under the aforementioned Service Level Agreement ranges at roughly 1,000 pieces at a unit price of Kshs 144. This brings the maximum monthly value of purchases made by the Respondent to kshs 144,000 and all previous and subsequent local purchase orders made by the Respondent correspond to this amount.9. That from the foregoing, the final invoice No. 2434 amounting to Kshs 9,521,565. 08 allegedly issued by the Petitioner to the Respondent is in respect of fictitious goods that have been ordered by the Respondent and have never been supplied by the Petitioner.10. That in addition to the foregoing, there is no way in which the Respondent would have made such a large amount of purchases in the month of January 2021 amidst the Covid-19 Pandemic and the subsequent directives issued by the Ministry of Health closing down business such as the Respondent’s. Infact, the Respondent duly notified the Petitioner about its closure as ordered by the Ministry of Health because of Covid-19 Pandemic. It simply could not have ordered goods when it was closed and non-operational. (Annexed herewith and marked “AK-3” are copies of letters dated 24th April 2020 and 16th July 2020 from the Respondent notifying the Petitioner of closure of the Respondent’s restaurants).11. That the Respondent herein stands to suffer irreparable financial and reputational damage if the Petitioner is allowed to prosecute the fictitious and illegal insolvency proceedings based on fictitious debt which the Respondent is neither aware of nor admits the existence of such debt.12. That in addition to the foregoing, this Petition is fatally defective and a non-starter as the aforementioned Service Level Agreement provides for arbitration as the method of dispute resolution between the parties herein, which process is yet to be initiated.

5. The petitioner opposed the application through the replying affidavit of its President Mr. Newton Matope who avers that:-1. It is not in dispute that by a Service Level Agreement dated 13th December 2019, the Petitioner agreed to provide the Respondent with various services including procurement, import, clearance, customs, transport, storage and handling services of products at controlled temperatures (the agreement).2. Sometimes in July 3029, the Respondent sought to purchase 312 cases of beef burger patties from its approved supplier based in Egypt known as Cairo Poultry Processing Company (the consignment). Subsequently in December 2019, the Respondent requested the Petitioner to provide it with services the Agreement for the Consignment. The Petitioner therefore arranged for the importation and subsequent storage of the Consignment, which it received on 7th March 2020. See annexure NM 2 of the replying affidavit .3. As at May 2020, the Respondent has not taken steps to collect the minimum monthly offtake of the beef burger patties. The result of this inaction is that the Respondent would incur additional storage and finance costs for consumption above the minimum monthly offtake aggregated every three months. Annexure 2 of the Agreement confirms that the pricing provided in the Agreement is based on the Respondent’s projected consumption volume of 120 cases/boxes per calendar quarter. Therefore, where the consumption is more, the Respondent would pay additional storage charges.4. On the Respondent’s confirmation, the petitioner received from Cairo Poultry Processing Company 312 beef burger patties under batch number 012603, which were produced on 26th January 2020 and were to expire 25th January 2021. 5.Since the Petitioner received the consignment sometime on 7th March 2020, the Respondent only consumed 11 cases of beef patties out of the 312 cases of beef patties it ordered. As a result, and as per annexure 2 of the Agreement, the Respondent is to pay the Petitioner additional charges for storage at the rate of USD 2. 30 per case/box per month.6. As at 8th January 2021 the Petitioner held in storage 301 beef burger patties under batch number 012603 which were set to expire on 25th January 2021 and the Petitioner constantly reminded the Respondent that it would issue its invoice for the services rendered. See annexure NM 4 of the replying affidavit.7. The Petitioner has annexed to the replying affidavit annexure NM3 which is an email trail exchanged on 18th February 2020 between the petitioner’s Newton Matope and the Respondent’s Ashwani Kadanga where Mr. Kadanga shows appreciation to the petitioner for arranging for the importation and subsequent storage of the consignment. The Petitioner has also annexed as annexure NM 3 its email dated 29th January 2021 through which it forwards its proforma invoice to the Respondent for settlement. 8. The Petitioner provided the services from 24th July 2019 to 31st January 2021 and subsequently raised several invoices , which the Respondent settled but failed to settle the petitioner’s invoice dated 31st January 2021 for the sum of Kshs 9,711,010. 11(the outstanding debt) as per Clause 4. 1. of the Agreement, which invoice has accumulated interest compounded daily at the annual rate of 20% per Clause 4. 2. of the Agreement. See annexure NM 6 of the replying affidavit.

6. Parties canvassed the application by way of written submissions, which I have considered. The main issue for determination is whether both the statutory demand and liquidation petition should be struck out.

7. The gist of the applicant’s case is that it is not indebted to the petitioner and that the alleged debt of Kshs 9,682,402. 33 lacks legal and factual basis. The applicant further contends that the alleged Statutory Demand dated 30th June 2021 that gave rise to the petition was not served on them or their directors.

8. The applicant maintained that it did not order goods or issue a Local Purchase Order (LPO) to the Petitioner amounting to a sum as gross as Kshs 9,521,565. 08 quoted in an alleged invoice No. 2434. It was further, the applicants case that this court lacks the jurisdiction to settle this dispute owing to the existence of an arbitration Clause in the Service Level Agreement.

9. On its part, the Petitioner argued that a debtor/creditor relationship exists between it and the applicant by virtue of their agreement. For this argument, the Petitioner cited the decision in the case ofKitmin Holding Ltd vs Noble Resources International Pte Ltd[2018]eKLR where the court stated, in relation to a dispute over a debt that:-“the company must show that the debt is disputed on bona fide grounds and the onus of discharging this is obviously on the company.”

10. On service of Statutory Demand, the petitioner submitted that the same was duly effected as envisaged under Section 384(1) (a) of the Insolvency Act, by leaving it at the debtor’s registered office.

11. On the jurisdiction of the court to hear and determine the petition, the petitioner submitted that Section 17(b) of the Arbitration Act allows this court to refuse to recognize or enforce an arbitral award where the subject matter of the dispute is not capable of arbitration under Kenyan Law or where the enforcement of the award would be contrary to the public policy of Kenya.

12. According to the Petitioner, this matter falls under disputes that are generally treated as non-arbitrable. For this argument, the petitioner cited the decision in Gerick Kenya Limited v Honda Motorcycle Kenya Limited[2019] eKLR where the court relied on the case of A. Ayyasamy vs A. Paramasivam & Others Civil Appeal No. 8245-8245-8246 of 2016 in which the Supreme Court of India outlined the following categories of disputes which are generally treated as non-arbitrable:a.Patent, trademarks and copyright;b.Anti-trust/competition laws;c.Insolvency/winding up;d.Bribery/corruptione.Fraud; andf.Criminal matters

13. My finding is that since the dispute herein involves insolvency of a company, the same cannot under Section 381 and 425 of the Insolvency Act be resolved by way of arbitration.

14. Turning to service of the Statutory Demand, I note that the Petitioner attached, to the replying affidavit, a string of email correspondence marked “NM7” and an affidavit of service of one Simon John (annexure “NM8”) to demonstrate that the same was served on the applicant. I am satisfied that the Statutory Demand was duly served on the applicant.

15. Turning to the prayer to strike out the Petition, I note that courts have taken the position that they will not strike out pleadings except where there is a clear case of abuse of the court process. In Brahmbhatt vs Dynamics Engineering (1986) KLR 133, the Court of Appeal expressed the view that: -“In an application to strike out a winding up petition, the Court should consider whether on evidence, it is plain and obvious case for striking out and whether the petition was bound to fail"

16. InCo-operative Merchant Bank Ltd. vs George Fredrick Wekesa Civil Appeal No. 54 of 1999 the Court held: -“The power of the Court to strike out a pleading under Order 6 rule 13(1) (b) (c) and (d) is discretionary and an appellate Court will not interfere with the exercise of the power unless it is clear that there was either an error on principle or that the trial Judge was plainly wrong.....Striking out a pleading is a draconian act, which may only be resorted to, in plain cases...Whether or not a case is plain is a matter of fact....A Court may only strike out pleadings where they disclose no semblance of a cause of action or defence and are incurable by amendment.”

17. In the present case, it was not disputed that parties herein entered into a Service Level Agreement (SLA) for various services that included arranging for the importation and subsequent storage of certain products.

18. The petitioner alleges that arising from the said Service Level Agreement, the applicant owes it an outstanding amount of Kshs 9. 6. million while the applicant maintains that it does not owe the said amount. My finding is that it is not possible to determine the whether the amount in question is due to the petitioner at this interlocutory stage of the petition as such a decision can only be made upon hearing the merits of the petition.

19. I am not satisfied that the applicant has made out a case for the striking out of the petition.

20. In sum, I find that the application dated 20th September 2021 is not merited and I therefore dismiss it with orders that costs shall abide the outcome of the petition.

DATED, SIGNED AND DELIVERED VIRTUALLY AT NAIROBI THIS 14TH DAY OF JULY 2022. W. A. OKWANYJUDGEIn the presence of: -Ms Okuta for Ms Akal for Petitioner.No appearance for Respondent.Court Assistant- Sylvia