[2004] KEHC 2523 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA

AT NAIROBI (MILIMANI COMMERCIAL COURTS)

Bankruptcy Cause 58 of 2004

IN THE MATTER OF MRS AMINA HAJI

AND

IN THE MATTER OF THE BANKRUPTCY ACTCAP 53 LAWS OF KENYA

RULING

On 19th April 2004, the Applicant Mrs. Amina Haji presented aBankruptcy petition under the provisions of Section 5 of theBankruptcy Act, Chapter 53, Laws of Kenya the (Act) for a receivingorder for the protection of her estate.

When the application was placed before my sister, Lady JusticeKasango on 26th April 2004, she declined to issue a receiving order"because the debts alleged to be due and the debtor is unable topay are debts payable by Target carriers Limited."

In the application dated 30th April 2004 and filed on the samedate under a Certificate of Urgency of the same date and drawn byher Advocates, Alex Karanja Ndungu & Co. the Petitioner seeks avariation of the court's order made on 26th April 2004 declining to make a receiving order against the Petitioner. The Petitioner swears in her Supporting Affidavit, para. 6:-

"6. That almost all the debts listed as being payable by Target Carriers Ltd are actually personally guaranteed by the Directors including myself making me liable to court action, and paragraphs 9 and 10.

"9. that the list of creditors above was not meant to be filed together with the statement of affairs but was meant to assist my Advocate prepare all documents for presentation to court.

10. That I verily believe from the information from the said Advocates that the inclusion of the list was inadvertent and was not meant to mislead the court at all."

The application is expressed to be brought under the provisionsof Sections 3(1) (f), 11, 97, 100 & 133 of the Act, and Rules 1, 15,16& 144 of the Bankruptcy Rules and all enabling provisions of the law.The application prays for orders that:-

(a) the Court do vary the order it made on 26. 04. 2004

(b) a Receiving Order be issued in respect of the estateof the Petitioner,

(c) the Court do order for a stay of any intended legalaction against the Petitioner,The application is based on the grounds:-

(a) That the Petitioner has consciously and after careful consideration of the consequences voluntarily presented this petition,

(b) That the Petitioner has as an individual fallen into bad times and has completely been overwhelmed by her commercial obligations hence the decision to adopt this painful course of action,

(c) That the Company Target Carriers Limited whose list ofcreditors was inadvertently filed together with the statement of affairswas not meant to be filed and almost all the debts included thereinwere incurred by the Petitioner and are due from her,

(d) That it is meet and just that the orders sought by the Petitioner begranted to enable the Official Receiver to take delivery of thePetitioner's estate;

For completeness of the record and the eventual conclusionand decision in this Ruling, I set out below the various provisions ofthe Act, and the Rules upon which this application is brought.

Section 3 of the Act lists the various acts of Bankruptcy, Section 3 (1)(f) states that a person commits an act of bankruptcy if he files in theCourt a declaration of his inability to pay his debts or presents abankruptcy petition. Section 11 of the Act grants the Courtjurisdiction to stay any action, execution or other legal processagainst the property or the person of the debtor, and on proof of presentation of a petition, the Court may either stay the proceedingsor allow them to continue on such terms as it may think just. Section97 of the Act invests jurisdiction in Bankruptcy in the High courtunless specifically or generally delegated by the Chief Justice to anysubordinate court. Section 100 of the Act grants the bankruptcy court"full power to decide all questions of priorities, and all questionswhatsoever, whether of law or fact which may arise in any caseof bankruptcy coming within its cognizance, or which the courtmay deem it expedient or necessary to decide for the purposesof doing complete justice or making a complete distribution ofproperty in any such case."

It is important to pose here for a moment. The Bankruptcy Actand the Bankruptcy Rules comprise a complete code on the subjectof Bankruptcy, and Rule 317(2) provides that the rules of procedure of the High Court shall not apply to any proceedings in Bankruptcy.Unlike the Civil Procedure Act, (Cap. 21 Laws of Kenya), and the CivilProcedure Rules which by Section 80 of the Act and Order XLIV ofthe Rules specifically provide for, and the manner, and by whom, andon what grounds, an order of the court may be reviewed, varied or setaside, there is no similar provision under the Bankruptcy Act or theRules for review, varying or setting aside an order made under theBankruptcy Act. It is Section 100 of the Bankruptcy Act which givesthe Bankruptcy Court "full power to decide all questions ofpriorities and all other questions whatsoever, whether of law orfact which may arise in any case of bankruptcy coming within itscognizance or which the Court may deem it expedient ornecessary to decide for purposes of doing complete justice

The Petitioner has applied and prays that the court do vary theorder of court made on 26th April 2004 by Lady Justice Kasango.Before deciding upon this prayer, it is again necessary to look at theother relevant provisions of the Bankruptcy Act. Section 8 of the Actprovides that a debtor's petition shall allege that the debtor is unableto pay his debts, and that the presentation of the petition is deemed to be an act of Bankruptcy even without the previous filing by thedebtor of any declaration of inability to pay his debts. Where such apetition is presented, the Court is bound to make a receiving order,and the only reason for refusing to do so is that the debtor has notpreviously filed with the official receiver his statement of affairs interms of Section 16 of the Act. A receiving order once made mayonly be withdrawn with the leave of the court.

Under Section 9 of the Act, on the making of a receiving orderthe official receiver is constituted the receiver of the property of thedebtor, and after the making of the receiving order except with theleave of, and on terms the court may impose under circumstancesprovided for under the Act, no creditor to whom the debtor is indebtedin respect of any debt provable in Bankruptcy shall have any action orother legal proceedings against the debtor. The only specificexception to this unfettered bar to realize any remedy against thedebtor, subject of a receiving order, is that of a secured creditor whomay still move against the debtor under the security granted by thedebtor to that creditor.

Further, a person who is subject to a receiving order enjoys theimmunities set out in Section 11 of the Bankruptcy Act. The Section provides that the Court may at any time after presentation of abankruptcy petition:-

(a) Stay any action, execution or other legal process against the Property or person of the debtor, and (b) on proof of "mere" presentation of the petition for

Bankruptcy, any court in which the proceedings are pending by or against the debtor may either stay the proceedings or allow them to continue on terms.1 have used the phrase "mere presentation" quite advisedly foralthough the grant of these immunities is subject to the discretion ofthe court, a receiving order will routinely be made on reliance uponthe certificate of the official receiver that the debtor has satisfied theconditions for the grant and issue of a receiving order. A receivingorder if made, has the effect of making the debtor a ward of Courtand any proceedings pending are stopped by operation of thereceiving order. A debtor who therefore applies to become a ward ofcourt pursuant to a petition for a receiving order under the BankruptcyAct will do so only in respect of debts for which he is personally liable.Where the court of Bankruptcy has any doubt about the alleged actsof Bankruptcy, the petition for a receiving order may be declined.

In the instant case, the Petitioner attached a list of debts whichthe petitioner swears were incurred by her personally. The listhowever schedules the debts under the name of Target CarriersLimited, a limited liability company. The Companies Act has a wholebody of provisions for dealing with insolvent companies, and theliability of its shareholders to contribute in the event of dissolution ofthe company. Unless therefore there is direct proof of the director'spersonal liability there will be little cause for the individual director toseek and be granted a receiving order for under section 118 of theBankruptcy Act no receiving order may be made against anycorporation or against any company registered under Companies Act.

When this cause first came before my sister, Lady JusticeKasango, she declined to issue a receiving order. To again use hervery words "I decline to issue a receiving order because the debtswhich the debtor alleged that she is unable to pay are debts payableby "TARGET CARRIERS LIMITED".

The application in issue seeks orders "to vary the order madeon 26th February 2004". The grounds in support of the prayersinclude paragraph 6 of the Supporting Affidavit of Mrs. Amina Hajiand paragraph 3 of the grounds, and are is in these terms,

"6. That almost all the debts listed as being payableby Target Carriers Ltd are actually personallyguaranteed by the directors including myself makingme liable to court-action"

and ground No. 3 of the grounds of the application-

"that the company Target Carriers Limited whose listof directors was inadvertently filed together with thestatement of affairs was not meant to be so filed andalmost all the debts included therein were incurred bythe Petitioner personally and are due from me."

I want to believe that when my sister, Lady Justice Kasango,declined to make the receiving order in this matter she must have hadat the back of her clear mind, the principles which underly thecorporate status of a limited liability company. Upon the issue of acertificate of incorporation, the company becomes a body corporateor, in other words a corporation (S.16(1)). Prior to the date of the certificate the company had no legal existence.

A corporation is not, like a partnership or a family, a merecollection or aggregation of individuals. In the eyes of the law it is aperson distinct from its members or shareholders, a metaphysicalentity or a fiction of law, with legal but not physical existence. It is as Lord Selborne said “a mere abstraction of law," and LordMacnaghten observed "at law a different person altogether fromthe subscribers to the memorandum of association". The principle of the independent existence of a company was explainedand emphasized by the House of Lords in the case of Salmon vsSalmon & Co. Ltd [1897] A.C. 22, 51.

In that case, Salmon a leather merchant and wholesale bootmanufacturer was the owner of a profitable business, and in order toobtain the advantage of limited liability, he, being, perfectly solvent atthe time, converted his business into a company. He took 20,000shares in the company, and his wife and five children took one shareeach. No other share was issued. Salmon received also mortgagedebentures to the amount of £ stg. 10,000. 00 in part payment by theCompany to the business. Later, the company went into financialdifficulties, the then holder of the debentures appointed a receiverand the company went into liquidation.

The Courts were asked to decide whether the debenturesoriginally issued to Salmon, were valid and entitled in priority over theunsecured creditors who denied them priority on the ground that thecompany was a "one-man company"" and a sham, and so Vaughan Williams J. held, that being of the opinion that A. Salmon & Co. Ltd was a mere alias or agent for Salmon, and, therefore, that Salmon was bound to pay the unsecured creditors of the company out of his own pocket notwithstanding that his shares had all been fully paid up. The Court of Appeal affirmed the decision of the learned Judge but on the ground that the whole scheme was a fraud on the policy of the Companies Act, and that it was never intended by the legislature that a company should consist of one substantial person and six mere dummies devoid of any real interest. This decision was unanimously reversed by the House of Lords on the ground that the only mode of ascertaining the intent and meaning of the Act was to examine its provisions and find what regulations it had imposed as a condition of trading with limited liability.

Lord Halsbury L.C. said:

".......... the statutes enact nothing as to the extent or

degree of interest which may be held by each of theseven, or as to the proportion of interest or influencepossessed by one of the majority of the shareholdersover the others."

Lord Macnaghten said:-

There is nothing in the Act requiring thatsubscribers to the Memorandum should beindependent, unconnected, or that they or any ofthem should take a substantial interest in theundertaking. Or that they should have a mind and willof their own, as one of the learned Lords Justicesseems to think or that there should be anything like abalance of power in the constitution of the company."

Already before Salmon's case in Farrar Vs. Farrar Limited, (1888) 40 Ch. D. 395, Lindley L. J. said:-

"A sale by a person to a corporation of which he is amember is not, either in form or in substance, a saleby a person to himself. To hold that it is, would be toignore the principle which lies at the root of the legalidea of a corporate body, and that idea is that thecorporate body is distinct from the personscomposing it. A sale by a member of a corporation tothe corporation itself is in every sense a sale valid inequity as well as at law."

There are many modern cases to this effect. This concept isembodied in Section 16 of the Companies Act, (Cap. 486 Laws ofKenya) that upon the issue of the Certificate of Incorporation thesubscribers to the memorandum of association and other persons who may later become members of the company become a bodycorporate by the name contained in the memorandum, capable ofexercising all the functions of an incorporated company with power tohold land and having perpetual succession and a common seal butwith such liability on the part of the members to contribute to theassets of the company in the event of its being wound up.

For the Petitioner to assume the liabilities of the companyTarget Carriers Limited, merely by a declaration to do so, is a matterwhich is not only contrary to the principle of separation as distinctlegal entity of the shareholder to the company, but does also call for acaution in the Court of Bankruptcy, and a little mo2re proof of theextent if any of such personal liability. Reference has been made topersonal guarantees. How were these made and between whichparties? We observe that the creditors list of Target Carriers Ltd asat 30th November 2003 contained some well known petroleumproducts suppliers and other well-known names in the motor vehicleindustry.

In as much as the petitioner seeks the protection of the Courtof Bankruptcy cognizance must also be taken of the position of thecreditors whose legitimate claims may well be paid put by issue of a receiving order. The Court of Bankruptcy will therefore not hesitate todecline to issue a receiving order in bankruptcy where there is even awhiff of suspicion that the Petition is brought largely to defeat thelikely legitimate claims of a large number of creditors like in thispresent case. This would really be an abuse of the process of thecourt (Re Bound (1888) 21 Q.B.D. 17). The clear philosophy behindthe issue of a receiving order is that the debtor is enabled to put hisaffairs together again during the currency of the receiving order, andbe protected from the pressure of a committal order by obtaining anadjudication in Bankruptcy against herself, she must therefore cometo court with clean hands. She must show how the debts of TargetCarriers Ltd suddenly became hers for there is a method, a way ofdealing with delinquent or insolvent companies like Target CarriersLtd, if, it is indeed insolvent. That way is not by its directors seekingand hiding behind receiving orders.

To avoid therefore an abuse of the process of the court ofbankruptcy, and as the Petitioner Mrs. Amina Haji has stated on oathin her Supporting Affidavit that the debts of Target Carriers Ltd werepersonally guaranteed by her, let the petitioner make full disclosurebefore the receiving order may be granted, how she guaranteed the debts before she can be afforded the protection of the court ofbankruptcy. The disclosures will enable the court to decide on thematters of the receiving order and consequences thereof and be ableto do complete justice as envisaged under Section 100 of theBankruptcy Act.

For these reasons, I decline to vary the order made on 26th April2004 by Lady Justice Kasango, and I also decline to grant theconsequential orders sought in the application herein. Theapplication filed by Mrs. Amina Haji on 30th April 2004 in BankruptcyCause No. 58 of 2004 is dismissed with costs.

Delivered and dated at Nairobi this 31st day of May 2004.

M. J. ANYARA EMUKULE

JUDGE