https://new.kenyalaw.org/akn/ke/judgment/kehc/2026/6956

**REPUBLIC OF KENYA IN THE HIGH COURT OF KENYA AT NAIROBI COMMERCIAL & TAX DIVISION** **BANKRUPTCY CAUSE NO. E004 OF 2022** **IN THE MATTER OF THE INSOLVENCY ACT, 2015** **AND** **IN THE MATTER OF JONATHAN KARANJA** **BETWEEN** **JONATHAN KARANJA...................................................................DEBTOR** **VERSUS** **AGS WORLDWIDE MOVERS LIMITED.....................CREDITOR/APPLICANT** **RULING** **Introduction** 1. Before this Court are two competing applications arising from insolvency proceedings commenced by the Debtor, Jonathan Karanja, against the Creditor, AGS Worldwide Movers Limited. 2. The first application is the Debtor’s Notice of Motion dated **22nd July 2022** brought under Sections 304, 305 and 306 of the Insolvency Act, 2015 seeking, inter alia: 3. Stay of execution of the decree and warrants of arrest issued in Nairobi HCCC No. 301 of 2014; 4. Stay of any execution or legal process against the Debtor and his property pending determination of the insolvency proceedings; and 5. Appointment of the Official Receiver as supervisor of the proposed composition or scheme of arrangement. 6. The application is supported by the affidavit of the Debtor, sworn on 22nd July 2022, wherein he depones that execution proceedings had commenced in **Nairobi HCCC No. 301 of 2014** following a judgment entered against him in the sum of **Kshs. 25,705,602.85**; that warrants of arrest had been issued against him; that he was financially distressed following the Covid-19 pandemic; and that he was unable to meet his financial obligations. 7. The second application is the Creditor’s Notice of Motion **dated 29th May 2023,** seeking principally: 8. Setting aside of all proceedings conducted in this matter from 23rd June 2022 to 24th April 2023; 9. Vacating and/or setting aside the orders issued on 4th October 2022 staying execution against the Debtor; and 10. Leave to participate in the proceedings. 11. The Creditor contends that the orders of 4th October 2022 were obtained ex parte without service, contrary to the Creditor’s right to be heard, and in conflict with orders previously issued in HCCC No. 301 of 2014, where a similar application for stay of execution had allegedly been dismissed. 12. The applications were canvassed by way of written submissions. I have considered the pleadings, affidavits, rival submissions and authorities cited. **The Debtor’s Submissions** 1. The Debtor filed two sets of submissions, one dated 10th July 2024 and the other dated 12th November 2024, and submitted that the insolvency proceedings were commenced in good faith and for purposes of obtaining protection contemplated under the Insolvency Act pending restructuring of his financial affairs. 2. The Debtor argued that the application before the Court merely seeks temporary protection from execution pending hearing of the insolvency proceedings and that the Creditor would still have an opportunity to challenge the Debtor’s financial disclosures and insolvency claim during the substantive hearing. 3. On the issue of res judicata and conflicting orders, the Debtor submitted that the earlier application in HCCC No. 301 of 2014 sought a stay pending appeal, whereas the present proceedings seek relief under the Insolvency Act and therefore arise from a distinct cause of action. 4. The Debtor further submitted that committal to civil jail is a drastic remedy and that the Court ought to exercise its powers under Section 22 of the Insolvency Act to stay execution proceedings pending determination of the insolvency cause. 5. On the Creditor’s application to set aside the proceedings, the Debtor maintained that the Creditor was served with the application and hearing notices and indeed filed a Notice of Appointment and Grounds of Opposition on 12th October 2022. 6. The Debtor therefore urged the Court to dismiss the Creditor’s application with costs. **The Creditor’s Submissions** 1. The Creditor also filed two sets of submissions, one dated 20th May 2024, and the other dated 3rd October 2024. The Creditor contended that the Debtor has failed to meet the statutory threshold under Sections 304 and 306 of the Insolvency Act. It was argued that the Debtor has neither provided a complete inventory of assets and liabilities nor demonstrated inability to pay debts within the meaning of the Act. 2. The Creditor relied heavily on the decision in **Rajendra Ratilal Sanghani v Schoon Ahmed Noorani [2018] eKLR** and asserted that a debtor seeking interim protection under the Insolvency Act must make full and candid disclosure of all assets, liabilities, creditors, and debtors. 3. The Creditor further submitted that the Debtor’s application was not brought in good faith but merely intended to obstruct execution of a lawful decree arising from HCCC No. 301 of 2014. 4. It is also argued that the interim orders issued on 4th October 2022 lapsed automatically after fourteen days pursuant to Section 306(5) of the Insolvency Act and could not lawfully subsist indefinitely pending the determination of the proceedings. 5. The Creditor additionally contended that the orders were obtained ex parte without proper service and in violation of Article 50(1) of the Constitution. 6. Reliance was placed on *Anyega v Gulf Africa Bank Limited & Another (Insolvency Petition E056 of 2021) [2023] KEHC 22008 (KLR)* and *In re James Maina Kabatha (Debtor/Applicant) [2020] eKLR* in support of the argument that bankruptcy protection is only available to honest debtors acting in utmost good faith and after full disclosure of their financial affairs. **Analysis and Determination** 1. Having considered the applications and submissions, the following issues arise for determination: 2. Whether the Debtor satisfied the threshold for grant of interim protection under Sections 304 and 306 of the Insolvency Act; 3. Whether the orders issued on 4th October 2022 were properly granted and whether they remain in force; 4. Whether the proceedings and orders should be set aside for want of service or violation of the Creditor’s right to fair hearing; and 5. What orders ought to issue. **Whether the Debtor satisfied the threshold under Sections 304 and 306 of the Insolvency Act** 1. Section 304(1) of the Insolvency Act provides that an application for an interim order may be made where a debtor intends to make a proposal to creditors for a composition in satisfaction of debts or a scheme of arrangement in relation to the debtor’s financial affairs. 2. Section 306 further sets out the conditions under which the Court may grant interim orders, including satisfaction that the debtor is bankrupt or capable of making an application for own bankruptcy and that the application is made bona fide. 3. The jurisprudence emerging from decisions of this Court has consistently emphasized the requirement of utmost good faith and full disclosure by a debtor seeking insolvency protection. 4. In **Rajendra Ratilal Sanghani v Schoon Ahmed Noorani [2018] eKLR,** the Court held that a debtor must provide a true and full inventory of creditors, liabilities and assets before the Court can conclude that a prima facie case of insolvency has been established. The Court stated as follows: “When dealing with an Applicant who is not yet adjudged Bankrupt, like the Debtor herein, the Court must be satisfied that the debtor is unable to pay his/her debts. While the Court is not expected to carry out a detailed examination as to the fortunes (perhaps misfortunes) of the debtor, the evidence presented must be such as to make out a prima facie case that the debtor is insolvent and is unable to pay his/her debts. It seems fairly elementary that such an assessment cannot be undertaken unless the debtor gives a true and full inventory of his creditors and debtors and other liabilities and assets…” 1. Similarly, in **Anyega v Gulf Africa Bank Limited & Another (supra),** the Court stated that insolvency proceedings should not be employed mischievously or as a means of defeating lawful debt recovery efforts. The Court, in dismissing the Petition, stated as follows; “For the foregoing reasons, the Court’s opinion is that the application was not made in good faith. On the material on record, it cannot be said that the applicant is bankrupt or could make an application for her own bankruptcy as at the time of making the application. The application is but an attempt to challenge and prevent the 1st respondent from exercising its statutory power of sale.” 1. In the present matter, the Debtor merely deponed that he was financially distressed, had been affected by the Covid-19 pandemic, and was unable to meet his obligations. 2. However, beyond those averments, the Debtor did not provide this Court with a comprehensive statement of affairs disclosing his assets, liabilities, creditors, debtors, income streams, or any concrete proposal for composition with creditors. 3. The Debtor also failed to demonstrate what steps, if any, had been undertaken towards restructuring his financial affairs since the filing of the application in July 2022. 4. Indeed, the material before Court suggests that the primary objective of the application was to forestall execution arising from the decree in HCCC No. 301 of 2014. While the Insolvency Act is intended to afford honest but unfortunate debtors an opportunity for financial rehabilitation, such protection cannot issue automatically upon mere assertion of financial hardship. 5. The Court must guard against abuse of insolvency proceedings as a collateral mechanism for delaying or defeating lawful execution. 6. I therefore find that the Debtor failed to satisfy the threshold for grant of substantive insolvency protection under Sections 304 and 306 of the Insolvency Act. **Whether the orders of 4th October 2022 were properly granted and whether they remain in force** 1. The record shows that on 4th October 2022, orders were issued staying execution “pending determination of the proceedings.” 2. Section 306(5) of the Insolvency Act expressly provides: “Except as otherwise provided by this Division, an interim order made on an application under section 304 ceases to have effect at the end of fourteen days from the date on which the order was made.” 1. The statutory language is mandatory and leaves no room for indefinite interim protection absent renewal or further lawful orders of the Court. Consequently, even assuming the orders of 4th October 2022 were properly issued, the same lapsed by operation of law fourteen days later. 2. The Court cannot sustain interim protection in perpetuity contrary to the express provisions of the statute. **Whether the proceedings and orders should be set aside for want of service** 1. The Creditor alleged that it was excluded from the proceedings and denied an opportunity to be heard. 2. The Debtor, however, contended that the Creditor had been served and indeed filed a Notice of Appointment and Grounds of Opposition. 3. From the material placed before Court, it is evident that the Creditor eventually became aware of the proceedings and participated to some extent by filing documents on record. The allegation that there was absolutely no notice cannot, therefore, be sustained. 4. Nevertheless, the record equally reveals procedural irregularities regarding service of hearing dates and progression of the matter after 18th October 2022, when the Court did not sit. 5. More importantly, the substantive difficulty with the impugned orders lies not merely in procedural service issues, but in the fact that indefinite stay orders were granted notwithstanding the limited statutory framework governing interim orders under the Insolvency Act. 6. In the circumstances, and in order to safeguard the right to fair hearing under Article 50 of the Constitution, the interests of justice require that the interim orders be vacated and the parties be restored to the ordinary legal position. 7. Accordingly, the Court makes the following orders: 8. The Debtor’s Notice of Motion dated 22nd July 2022 is hereby dismissed. 9. The interim orders issued on 4th October 2022 staying execution against the Debtor are hereby vacated and/or set aside. 10. For avoidance of doubt, the said interim orders lapsed by operation of Section 306(5) of the Insolvency Act fourteen days after issuance. 11. The Creditor’s Notice of Motion dated 29th May 2023 is allowed to the extent aforesaid. 12. Costs of both applications are awarded to the Creditor, which is hereby assessed at Kshs. 50,000/-. 13. is so ordered. **DATED, SIGNED, AND DELIVERED AT NAIROBI** **THIS 14TH DAY OF MAY 2026**  **HON. MR. JUSTICE MOSES ADO** *Judge of the High Court* **In the presence of: -** C/A – *Moses* *Gakaria…………………. for the Debtor/JD* *N/A….……………. DH*