[2023] KEHC 25142 (KLR)

Jabavu Village Limited v Credit Bank Plc (Insolvency Notice E179 of 2022) [2023] KEHC 25142 (KLR) (Commercial and Tax) (10 November 2023) (Ruling)

Neutral citation: [2023] KEHC 25142 (KLR)

Republic of Kenya

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

Commercial and Tax

Insolvency Notice E179 of 2022

FG Mugambi, J

November 10, 2023

Between

Jabavu Village Limited

Debtor

and

Credit Bank Plc

Creditor

Ruling

1. This ruling determines the application dated 21st December 2022 seeking to set aside the statutory demand dated 1st December, 2022. The application was premised on the grounds set out on the face of it and supported by the affidavit sworn by Abdulkadir Ahmed Hussein, a director of the applicant.

2. The grounds on which the application is sought are that the statutory demand is defective; that the statutory demand omits other necessary parties that are pertinent to the underlying debt; that the statutory demand mis-states the debt due from the applicant and finally that the stated debt of USD. 4,700,000 which the applicant converts to Kshs. 578,100,000/=, due from the respondent is fully secured.

3. In any case, the applicant avers that it cannot be considered to be insolvent as the value of its assets exceed the alleged debt. Finally, the applicant avers that it is currently undertaking a housing project where it expects to receive an amount of Kshs. 7,683,000,000/=. The respondent is aware of the project and the actions that the applicant has taken so as to improve its liquidity and cashflow for purposes of the project.

4. The application was opposed by way of Grounds of Opposition dated 15th February 2023. The respondent disagrees with the submission that the statutory demand is defective. The respondent further notes that the applicant has admitted to the debt of USD 4,700,000 and that the same was secured. The respondent however argues that it is at liberty not to enforce the securities that it holds and that it was within its right to institute alternative recovery methods such as the insolvency proceedings herein. Finally, the respondent takes issue with the applicant for not providing any evidence to demonstrate that the amounts in the statutory demand do not reflect the applicant’s indebtedness.

Analysis 5. The Court has carefully considered the pleadings, submissions and evidence placed before it by rival parties. Before I venture into the substance of the application, I wish to deal with the question of validity of the statutory demand. The applicant contends that the demand was defective as it was not endorsed by the Deputy Registrar before it was served on the Company. This is supposedly in contravention of the mandatory terms under regulation15(3) and (4) as read together with Regulation 77B(2)(a) of the Insolvency Regulations, 2016.

6. For the avoidance of doubt, these provisions read as follows: Regulation 15:“(1)For the purposes of section 17 of the Act, the procedure for complying with or setting aside a demand is as provided under regulations 16 and 17. (3)The petition shall be preceded by a statutory demand and shall be in Form 6 set out in the First Schedule.(4)The statutory demand in sub regulation (3) shall be endorsed by the Deputy Registrar of the High Court before it is served on the debtor.”

7. Regulation 15 of the Insolvency Regulations falls under Part V of the Regulations which relates to personal insolvency. The introductory part to regulation 15 in fact refers to section 17 of the Act which is to be found in Part III of the Act, again on Bankruptcy of Natural Persons. It is clear therefore that regulation 15 does not apply to insolvency but to bankruptcy of natural persons. On the converse, regulation 77B(2)(a) of the regulations requires that:Regulation 77B(2)(a):-“The petition for liquidation shall be accompanied by the following documents—(a)a statutory demand in Form 32E set out in the First Schedule if the reason for petition is indebtedness; and....”

8. The format of Form 32E which is a statutory demand, contains a provision for the form to be endorsed by the Deputy Registrar before service. The statutory demand which was served on the applicant was not endorsed.

9. Even then, I note that while the requirement for endorsement appears on the face of the Form 32E, such requirement is not imposed by regulation 77B of the regulations as it is in regulation 15. The former is applicable in this case and I therefore find and hold that failure to endorse the statutory demand by the Deputy Registrar does not invalidate the demand issued by the petitioner.

10. As to the requirements of form, I concur with the observation of the Court in Re: Sucasa at Mombasa Road ML HC INC No. 9 of 2018 [2019] eKLR. The Learned Judge quoted with approval from the Halsbury’s Laws of England (4th Ed, Vol 7(2)) para. 1446 on the ingredients of a statutory notice:“The statutory demand must be dated and be signed by the creditor himself or by a person authorized to make the demand on the creditor’s behalf. The statutory demand must state the amount of the debt and consideration for it or if no consideration the way if (debt) arises … The statutory demand must include an explanation to the Company of the following matters: (a) Purpose of demand and fact that if demand is not complied with, proceedings may be initiated for winding up; (b) time for compliance with notice if consequential is to be avoided and (c) methods of compliance open to the Company.” (Emphasis mine).

11. I have carefully studied the statutory demand dated 1st December 2022. While the same is not signed, it does state the amount of the debt, the timelines for compliance, and it does contain a notice of liquidation if the debt is not paid and finally the methods of compliance open to the Company.

12. Moreover, it is now settled that non-compliance with the form of the statutory demand is not fatal as long as there was substantial compliance with the requirements of the law. (see for instance Re: Kipsigis Stores Limited ML HC INC No. 14 of 2016 and Re: Sucasa at Mombasa Road ML HC INC No. 9 of 2018 [2019] eKLR and Re: F. M. Macharia (K) Limited [2017] eKLR. I associate myself with this position.

13. While I am cognizant of the phraseology of regulation 77B of the regulations to the extent that compliance with Form 32E is mandatory, in view of the decisions I have cited, I find that the statutory demand issued by the respondent dated 1st December 2022 substantially complies with the Form 32E and it sets out all the ingredients of a statutory demand as required by section 384(1)(a) of the Act.

14. Having said that, I now turn to the substance of the application. Regulation 17(6) of the Insolvency Regulations provides the grounds upon which the Court can set aside a statutory demand as follows:“The Court may grant the Application if:(a)The debtor appears to have a counterclaim, set-off or cross-demand which equals or exceeds the amount of the debt or debts specified in the statutory demand;(b)The debt is disputed on grounds which appear to the Court to be substantial;(c)It appears that the creditor holds some security in respect of the debt claimed by the demand, and either paragraph (6) is not complied with in respect of the demand, or the Court is satisfied that the value of the security equals or exceeds the full amount of the debt, or;(d)The Court is satisfied, on other grounds, that the demand ought to be set aside.”

15. The applicant disputes the amounts as stated in the statutory demand. In Flower City Limited V Polytanks & Containers Kenya Limited, [2021] KEHC 34 (KLR) the Court, Mativo J (as he then was) was emphatic that even though it may not be possible to provide a closed list of the elements of a genuine dispute, the applicant must:“(i)Show a plausible contention requiring investigation;(ii)Be bona fide, genuine and real;(iii)Be in good faith and show a prima facie plausibility;(iv)Truly exist in fact, and contain a serious question to be tried;(v)Be something more than mere bluster or mere assertion;(vi)Be a claim that may have some substance;(vii)Have a sufficient degree of cogency to be arguable;(viii)Have objective existence; and(ix)Have sufficient factual particularity.”

16. This view was espoused in Universal Hardware Limited V African Safari Club Limited, [2013] eKLR, where the Court noted that:“The principle as I understand is that a disputed debt on substantial and bona fide grounds cannot be the subject of a winding-up proceeding on account of the company’s inability to pay its debts.”

17. Likewise, in Flower City Limited V Polytanks & Containers Kenya Limited [supra], the Court also held that:“Decided cases are in agreement that the Court can set aside a Statutory demand if it is satisfied that there is a genuine dispute about the existence of the debt; or if the Court is satisfied that there is a genuine dispute about the amount of the debt, so much of that amount as the Court is satisfied is not the subject of such a dispute.”

18. It is against the aforesaid principles that I shall now consider the matter in light of the correspondence furnished by the parties in their respective depositions. By way of a letter dated 3rd March 2022, the respondent advanced to the applicant a credit facility of USD 5,273,332. 22. The facility was subject to various securities listed in the offer letter comprising of a legal charge, an all asset debenture, individual, corporate guarantee and indemnity, an individual guarantee and indemnity as well as a joint and several guarantee and indemnity.

19. In satisfaction of the requirement under the letter of offer, the applicant attached a charge dated 15th September 2020 over LR. No. Nairobi/Block31/219 in favour of the respondent for Kshs. 1,200,000,000/=. A valuation was conducted by Ms. GIMCO Ltd evidenced by the valuation report dated 20th December 2022. The said valuation places the value of the security at Kshs. 1,361,800,000/= for the land and USD 24,265,109. 75 for the preliminary works.

20. The applicant has also annexed a contract between the applicant and Ms. Zhongjiao Third Highway Engineering Ea Company and other documents relating to the proposed redevelopment of Jevanjee Bachelors Housing. Finally, the applicant annexed a letter dated 21st Aril 2022 from the respondents demanding arrears of USD 6,803,485. 51.

21. I note that there is no evidence to support the allegation by the respondent of the debt due, such as bank statements. I further note that while the letter of 21st Aril 2022 from the respondents demands arrears of USD 6,803,485. 51, the statutory demand issued was for USD 4,700,000. Noteworthy is the fact that the demand letter was written one (1) month after the offer letter for the facilities.

22. Of importance also is that the respondent does not deny that it holds securities for the facilities advanced to the applicant. It is not controverted that these securities are sufficient to settle the debt. I must say that I do not agree with the argument by the respondent that liquidation proceedings are an ideal alternative of pursuing its debt where there are sufficient securities.

23. The issuance of a statutory demand should be understood as a test of corporate solvency. One of the grounds that the Court may apply to set aside a demand is where it appears that the creditor holds some security in respect of the debt claimed by the demand, and either paragraph (6) is not complied with in respect of the demand, or the Court is satisfied that the value of the security equals or exceeds the full amount of the debt.

24. Once this is established it means that the debtor passes the test of solvency. This may be understood in the sense that a debtor may be technically solvent but may lack liquid cash to settle his debts. There is sufficient case law to support the fact that a creditor’s petition should not be entertained if it is used to enforce a debt that is disputed where the company is solvent. Such would otherwise amount to abuse of the process of the Court and an abuse of the insolvency law and should be struck out on that basis.

25. This is what the Court of Appeal observed on the subject in Matic General Contractors Limited V Kenya Power and Lighting Company Limited, [2001] eKLR as follows:“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”.In applying the foregoing judicial pronouncements, I am not satisfied that the respondent has made out a case to have the statutory demand against the applicant upheld.

Determination 26. In conclusion therefore, I allow the Notice of Motion dated 21st December 2022 and set aside the statutory demand dated 1st December, 2022. The respondents shall bear the costs of these proceedings.

DATED, SIGNED AND DELIVERED IN NAIROBI THIS 10TH DAY OF NOVEMBER 2023. F. MUGAMBIJUDGE