[2023] KEHC 20870 (KLR)

In re Davani Group Limited (Insolvency Petition E050 of 2022) [2023] KEHC 20870 (KLR) (Commercial and Tax) (27 June 2023) (Ruling)

Neutral citation: [2023] KEHC 20870 (KLR)

Republic of Kenya

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

Commercial and Tax

Insolvency Petition E050 of 2022

DO Chepkwony, J

June 27, 2023

Between

David Njane

1st Applicant

Davani Group Limited

2nd Applicant

and

Henia Ruara

1st Petitioner

Duncan Anzala

2nd Petitioner

Ruling

1. These proceedings were commenced through a Liquidation Petition dated October 31, 2022 filed by the Petitioners in their capacity as Creditors “The Advocates” against Davani Group Limited “the Company”. The Advocates seek liquidation of the Company for the reasons that it issued a 21 days statutory demand dated October 3, 2022 for payment of Kshs 10,414,461. 99 which was not paid and they therefore hold that the Company is unable to pay its debts.

2. The Company has now filed a Notice of Motion Application dated 22nd December, 2022 under Sections 1A,1B and 3A of the Civil Procedure Act and Order 51 both of the Civil Procedure Rules which is the subject of this ruling. The Application is seeking the following orders:-a.Spent;b.Spent;c.That pending the hearing and determination this Petition an order of temporary injunction be issued as against the Petitioners/Respondents jointly and severally, their agents, servants, representatives or any other person acting under their instructions barring them from issuing a demand notice, advertising for sale, appointing an administrator or liquidator in any other manner interfering with the applicant’s quiet enjoyment of all its assets (including debentures, credit facilities as charged and or accessible by the 2nd Respondent;d.That pending the hearing and determination of this Petition this Honourable Court be pleased to stay the proceedings herein;e.That an order for injunction be issued against the Petitioners/Respondents, jointly and severally their agents, servants, representatives or any other person acting under their instructions barring them from issuing a demand notice, advertising for sale, appointing an administrator or liquidator in any other manner interfering with the Applicant’s quiet enjoyment of all its assets (including debentures, credit facilities as charged and or accessible by the 2nd Respondent;f.That the Honourable Court do strike out the Insolvency Petition dated October 31, 2022;g.That costs of this application be provided for.

3. The Application is based on the grounds set out on its face and the Supporting Affidavit of David Njane sworn on December 22, 2022. According to the Company, it instructed the Advocates to undertake conveyancing works towards the purchase of some properties for the establishment of Watamu Bay Hotel in the year 2017 and they reached an agreement for legal fees of Kshs 5,000,000. 00. The Company holds that the financial institution financing the project opted to engage advocates on its panel and they were forced to discontinue the services of the Advocates but paid a sum of Kshs 3,000,000. 00.

4. It is the Company’s averment that the Advocates filed an Advocate-Client Bill of Costs vide Misc Cause No E161 of 2020 and obtained a Certificate of Taxation dated November 12, 2021 which taxed the costs at Kshs 9,989,999. 97. The Company further avers that the Advocates then sought for Judgment to be entered for the taxed costs which was allowed on May 26, 2022 for the sum of Kshs 10,000,000. 00 and which was all based on material nondisclosure of facts.

5. The Company holds that the Advocates commenced Insolvency proceedings alleging that it is insolvent and unable to pay its debts. It also holds that it was in the process of seeking financial assistance from Kenya Commercial Bank when the Advocates served it with the Insolvency Petition which made it stop seeking the financial assistance. The Company further holds that the Insolvency Petition has caused legal and financial challenges upon it when the same is based on material non- disclosure of facts and an illegality.

6. The Company seeks for an injunction to issue against any interference of any of its assets and to stay these proceedings pending the determination of the application to set aside the Judgment and decree in Misc Cause No E161 of 2020.

7. The Advocates filed the Replying Affidavit sworn on January 20, 2023 in opposition to the application. The Advocates confirm that the Company contracted it to represent them in a conveyance transaction and since there was a financier, the Firm of M/S Cootow & Associates Advocates were instructed to act for the financier of the Applicant. The Advocates hold that their fees was to be paid at the end of the transaction and they issued a deposit request invoice of Kshs 6,300,000. 00. They however denied the invoice the Company alleged to have received or even receiving Kshs 3,000,000. 00 from the Company.

8. The Advocates also stated that since the Company did not pay the fees as required, they filed their Advocate-Client Bill of Costs which was taxed and adopted as Judgment of the Court in the sum of Kshs 10,000,000. 00. The Advocates contend that the Company failed to pay the amount and it instructed Beyond Auctioneers to attach the Company assets, who then reported back that the Company did not have any assets. The Advocates also hold that the Company has not served them with any application to set aside the judgment as claimed and therefore the application should be dismissed with costs.

9. The parties were directed to canvass the application by way of written submissions by the court.

The Submissions 10. The Company’s submissions are dated February 13, 2023 and thereinFour issues were raised to wit;a.Whether this Honourable Court should grant an order for temporary injunction as sought by the Applicants.b.Whether the alleged claim by the Respondent is disputed.c.Whether this Court should strike out the insolvency proceedings.d.Who should bear the costs of this application.

11. The Advocates’ submissions are dated February 21, 2023 wherein they have raised the following issues for determination:-a.Whether the Applicants have the requisite locus standi to make the application herein.b.Whether the Application meets the threshold for grant of injunctive orders.c.Whether the Insolvency Petition ought to be maintained, sustained and prosecuted.

Analysis and Determination 12. This Court has considered the application by reading through the affidavit in support of it alongside the Replying Affidavit and submission filed by each party and summarizes the issues for determination as follows:-a.Whether the court should grant injunctive orders.b.Whether the Insolvency Petition should be stayed or struck out.

Whether the court should grant injunctive orders 13. In respect of the injunctive orders, the Court of Appeal in Nairobi in the case of Nguruman Limited v Jan Bonde Nielsen & 2 Others [2014]eKLR relied on the principles established in the Giella v Cassman Brown & Co Ltd [1973]EA 358 and held as follows:-“In an interlocutory injunction application, the Applicant has to satisfy the triple requirements to;a.establish his case only at a prima facie level,b.demonstrate irreparable injury if a temporary injunction is not granted, andc.ally any doubts as to (b) by showing that the balance of convenience is in his favour.These are the three pillars on which rests the foundation of any order of injunction, interlocutory or permanent. It is established that all the above three conditions and stages are to be applied as separate, distinct and logical hurdles which the Applicant is expected to surmount sequentially.”

14. The Court of appeal in the case ofMrao Ltd v First American Bank of Kenya Ltd & 2 Others[2003]KLR 125 considered what constitutes a prima facie case and held that:-“In civil cases, a prima facie case is a case in which on the material presented to the court, a tribunal properly directing itself will conclude that there exists a right which has apparently been infringed by the opposite party to call for an explanation or rebuttal from the latter”

15. In order to establish whether the Company in this case has a legal right which has been infringed it is important to establish whether there exists an Advocate-Client relationship between the parties, and more particularly whether there is a debt owed to the Advocates herein.

16. From the record, it is clear that there was a Decree issued on May 26, 2022 whereupon Judgment was entered against the Company in the sum of Kshs 9,990,877. 97 together with costs of Kshs 10,000. 00 The Company holds that they have filed an application to set aside the Decree in Misc No E161 of 2020 but have not attached any evidence of any such application. Therefore the Decree remains to be binding and enforceable as against the Company.

17. The Company’s position is that it discontinued the services of the Advocates and used the financier advocates in the conveyance transaction but there is no evidence of the creation or the termination of any such Advocate – Client relationship. The Advocates also confirm that the Firm of M/S Cootow & Associates Advocates were contracted to act for the financier of the

Applicant. 18. Be that as it may, it is evident that if there is a debt owed, it is the amount of debt that is in question. According to the Company, upon termination of the advocates’ services, it claims to have paid Kshs 3,000,000. 00 on diverse dates but it failed to include the mode of payments, date of payments or even evidence of the said payments. The Advocates claim that they issued an invoice of Kshs 6,300,000. 00 which remained unpaid leading to the filing of the Advocate-Client Bill of Costs and the Decree of the court was issued in the sum of Kshs 10,000,000. 00 together with costs. The Advocates then filed the present liquidation order against the Company.

19. It is trite that a debt must be proved for an order of liquidation to issue. In the Court of Appeal’s decision in the case of Universal Hardware Limited v African Safari Club Limited, MSA CA Civil Appeal No 209 of 2007 [2013]eKLR, held that:-“The thread running through these authorities is that in entertaining a Petition to Wind-up a Company on account of non-payment of debts, the court must be satisfied that the debt is not disputed on substantial grounds and is bona fide. If it is, then the winding-up proceedings are not the proper remedy. The substantial dispute must be the kind of dispute that in an ordinary civil case will amount to a bona fide, proper or valid defence and not a mere semblance of a defence. It is not sufficient for a company to merely say for instance that we dispute the debt. The Company must go further and demonstrate on reasonable grounds why it is disputing the debt.”

20. In this case, the Company disputes the debt and holds that it discontinued the services of the Advocates and that it was not required to pay any fees. It further contends that since there was an Advocate-Client Agreement, the Advocates were not required to file Advocate-Client Bill of Costs. The Company holds that it is pursuing an application to set aside the Judgment and Decree hence these Insolvency proceedings should be stayed. But there is no evidence has been tendered on the said application or the status of Misc No E161 of 2022 to warrant the grant of these orders.

21. However, in as much there is no proof that there is an application to set aside the Judgment and decree in Misc E161 OF 2022, it is this Court’s considered view that a liquidation order is a draconian step which has the effect of paralyzing a Company’s operations. In its decision in the case of Matic General Contractors Limited –vs- Kenya Power and Lighting Company Limited (2001) eKLR 3493, the Court of Appeal stated:-“In the case of In Re a Company [1984] 2 Ch 349, it was held that where a Petition against a Company is presented ostensibly for a Winding-up order, but really for another purpose, such as putting pressure on a company, the court has an inherent jurisdiction to prevent such an abuse of process, and will do so, without requiring an action to be commenced, by restraining the advertisement of the Petition, and staying all proceedings upon it. I have no doubt in my mind that the Learned Judge was right in placing emphasis on the Appellant’s motives, which in my view, were completely dishonourable. A Winding-up order is a draconian order. If wrongly made, the company has little commercial prospect of reviving itself and recovering its former position. If there is any doubt about the claim that seems to me to require that the Court, should proceed cautiously”.

22. In hearing and determining a Liquidation Application, the powers of the court are provided for under Section 427 of the Insolvency Act which reads:-“(1)On the hearing of a liquidation application, the Court may make such of the following orders as it considers appropriate:a.an order dismissing the application;b.an order adjourning the hearing, conditionally or unconditionally;c.an interim liquidation order; ord.any other order that, in its opinion, the circumstances of the case require.(2)…(3)…(4)… 23. In exercising the court’s discretion, there must be a balance the interest of both the Company as Debtors and the Advocates as the Creditors. Given that there is no application to set aside the Judgment and Decree of the court, hence the same remain binding and enforceable, it will be unfair to stay these proceedings since the status of the application to set aside the Judgment vide Misc. E161 of 2022 remains to be unknown. It is further unfair to issue injunctive orders over the assets of the Company since the Advocates have a right to enjoy the fruits of their Judgment which is still in force and the same have not been set aside.

24. In that regard, I hereby dismiss the application dated December 22, 2022 with costs to the Advocates.It is so ordered.

RULING DELIVERED VIRTUALLY, DATED AND SIGNED AT KIAMBU THIS 27TH DAY OF JUNE, 2023. D. O. CHEPKWONYJUDGEIn the presence of:Mr. Otieno holding brief for Mr. Oginder for KCB Bank.Mr. Oguttu holding brief for M/S Jan Mohamed counsel for Respondent/Petitioners.Court Assistant - Martin