[2024] KEHC 11006 (KLR)

Karithi & 5 others v Africa Merchant Ass Co Ltd (Insolvency Cause E004 of 2020) [2024] KEHC 11006 (KLR) (Commercial and Tax) (20 September 2024) (Ruling)

Neutral citation: [2024] KEHC 11006 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts)

Commercial and Tax

Insolvency Cause E004 of 2020

FG Mugambi & CN Mugambi, JJ

September 20, 2024

IN THE MATTER OF AFRICA MERCHANT ASSURANCE CO LTD

AND

IN THE MATTER OF THE INSOLVENCY ACT

(CHAPTER 53 OF THE LAWS OF KENYA)

Between

Elizabeth Wawira Karithi

1st Petitioner

Anisia Muthoni Njeru

2nd Petitioner

Faith Muthoni Mwendia

3rd Petitioner

Silas Muriuki Kinoti

4th Petitioner

Abel Mwangi

5th Petitioner

John Mwangi

6th Petitioner

and

Africa Merchant Ass Co Ltd

Respondent

Ruling

Introduction And Background 1. For determination is the respondent’s (“the Company”) application dated 24/11/2023. It is brought under section 698 of the Insolvency Act (Chapter 53 of the Laws of Kenya), Regulation 10(4) of the Insolvency Regulations, sections 1A and 1B of the Civil Procedure Act(Chapter 21 of the Laws of Kenya) and Order 1 Rule 10(2) of the Civil Procedure Rules. The Company principally seeks to review and set aside the liquidation order made against it on 18/11/2020.

2. The application is supported by the affidavit by Eric Lagat Keter, the Company’s Chief Executive Officer sworn on 24/11/2023. It is opposed by the petitioners through the replying affidavit of their advocate, Morris Karigi sworn on 3/6/2024.

3. It is common ground that on 24/2/2020, the petitioners filed a petition seeking to inter alia liquidate the Company under the supervision of the Official Receiver. The petitioners’ case is that on diverse dates in the year 2017,2018 and 2019, they instituted various civil suits against the Company for payment to them of decretal sums awarded to them in suits against the Company’s insured. That judgment was entered in the petitioners’ favour in the various courts and the Company was directed to pay the petitioners a total sum of Kshs. 10,235,552. 17 plus costs and interest.

4. The petitioners contended that the Company had failed to honour its obligation to pay the full decretal sums and costs as ordered by the court and that attempts of execution of the decrees had proven to be futile.

5. After considering the petition, the court, in a ruling dated 18/11/ 2020 (“the Ruling”) allowed it ex-parte, on account of non-attendance and issued a liquidation order against the Company (“the liquidation order”). It is the liquidation order that precipitated the filing of an application dated 22/11/2020 by the Company that sought to stay, review and set aside the liquidation order and that the Company be granted an opportunity to file an answer to the petition.

6. In a ruling dated 16/9/2021, the court set aside the liquidation order on condition that the Company pays Kshs. 1,000,000/= into a joint interest earning account held by the parties’ advocates on record within 60 days of the ruling. The court further allowed the Company to file and serve a response to the petition.

The Application 7. The Company asserts that it promptly filed and served its response to the petition in full compliance with the court’s directions. However, it contends that the petitioners' advocates have actively hindered its efforts to comply with the court’s order to deposit funds into a joint interest-earning account. Specifically, the Company claims that its advocates provided the necessary bank documents to the petitioners' advocates, who subsequently refused to sign the documents required to open the account.

8. As a result of these deliberate delays, the Company was compelled to file an application on 16/6/2022 seeking an extension of the court’s orders, presenting clear evidence of the petitioners' advocates' obstruction. The Company avers that as a result of the liquidation order and subsequent conduct by the petitioners’ advocates, the Company has been seriously prejudiced, embarrassed and affected in its operations and unless the orders sought in this application are urgently granted, the Company will be formally taken over by the Official Receiver.

9. The Company further asserts that it has already paid all amounts in question under the petition and faces the real risk of being unjustly condemned for a non-existent debt. Despite being fully aware of the existing liquidation order, the petitioners’ advocates continue to execute actions against the Company, which the Company argues is clear proof of its solvency.

10. Additionally, the Company claims that it has made repeated attempts to engage the petitioners’ advocates through the Office of the Official Receiver, but these efforts have been met with deliberate unresponsiveness and malicious intent. The Company emphasizes that the liquidation of an insurance company would have severe collateral consequences on the public, especially innocent policyholders.

The Petitioners’ Reply 11. The petitioners term the application as unmerited, misconceived, bad in law, clad with blatant lies and purely meant to engage them in endless litigation. It is their case that the application is res judicata as the court has already made a determination on the issues raised by the Company in the ruling of 16/9/2021 and as such, the court has no jurisdiction to review the said orders.

12. The petitioners argue that it is the Company that willfully failed to comply with the court’s orders within the stipulated timelines, as evidenced by the Company’s own deposition. They further assert that, as shown in the Company’s annexure ELK6, the Company only deposited the required funds with its advocates on 15/12/2021 - almost 90 days after the court’s ruling.

13. The petitioners contend that the Company’s claim that they obstructed the opening of the accounts is both baseless and malicious, given that the account opening forms were provided after the court’s deadline, and the completed forms were promptly returned to the Company’s advocates.

14. The petitioners aver that despite the Company’s failure to comply with the court’s orders of 16/9/2021, the court extended the compliance deadlines, granting the Company further indulgence. On 19/5/2022, the Company was given a final opportunity to comply, yet it once again failed to meet the court’s directives, even though the petitioners had executed the account opening forms within the required timelines. Instead, the Company filed yet another application dated 16/6/2022 seeking extension of time within which to comply. The court agains indulged them and allowed a further twenty (20) days within which to comply. The Company did not comply with the orders of the Court as evident from annexure ELK8 of the Company’s deposition.

15. The petitioners aver that the court’s ruling of 16/9/2021 has never been appealed against and remains in force. That in any case the Company has not denied being indebted to them and has not made any substantial payment of the amounts due. More particularly, the petitioners state that the respondent has failed to settle the decretal sums due and owing to the 3rd petitioner despite two courts of competent jurisdiction making a determination on the said matter.

16. Overall, the petitioners state that the Company has not demonstrated good faith in dealing with this matter and is therefore underserving of the court's discretion. Further that the company has not also demonstrated what it stands to suffer should liquidation proceed. On the other hand, the petitioners will continue to suffer prejudice if the liquidation order is set aside for the third time. They therefore pray that the court dismisses the application and upholds their right to benefit from the liquidation order.

Analysis and Determination 17. I have carefully considered the pleadings, evidence and submissions made by the parties. The main issue for determination is whether the court should review and set aside the liquidation order of 18/11/ 2020. The Company’s repeated non-compliance with court orders, specifically regarding the requirement to deposit Kshs. 1,000,000/= into a joint interest-earning account, as a pre-condition for this, is well-documented and supported by the evidence before the court.

18. Even now, three years later, the Company has failed to comply with the court’s orders of 16/9/2021. While the Company attributes these delays to alleged frustrations caused by the petitioners' counsel, my review of the correspondences and sequence of events leads to a clear conclusion that the Company has not shown any serious intention or effort to comply with the various orders issued by this court.

19. It is rather unfortunate that the Company does not recognize that these directions would have afforded it an opportunity to present its defense on the substance of the petition. Had the Company been genuinely committed to defending itself, it would have ensured compliance with the court orders in a timely manner, rather than waiting until the last minute to seek extensions and further indulgences.

20. It is quite clear that the Company has consistently missed court-imposed deadlines and engaged the petitioners’ advocates in back-and-forth discussions over account-opening procedures, particularly as deadlines approach, while deflecting responsibility onto others. This pattern of behavior suggests a deliberate attempt to delay compliance, rather than a genuine effort to resolve the matter.

21. One of the key arguments raised by the Company in support of its application is the claim that it has settled all outstanding amounts owed to the petitioners.

22. On 5/12/2023, the parties appeared before this court after the Company filed the present application. The court, in response, stayed the liquidation order for 60 days to allow the Official Receiver to file a report determining whether any sums remained outstanding to the petitioners. This report was subsequently filed on 11/3/2024.

23. In the report dated 8/3/2024, the Official Receiver notes that the outstanding sums due to the 1st petitioner Elizabeth Wawira Karithi was Kshs. 402,821/= as at 26/1/2024. The petitioners counsel through a letter dated 25/1/2024 to the Official Receiver acknowledges that an amount of Kshs. 3,600,000/= had been paid to this petitioner.

24. The report also confirms that the matter concerning the 2nd petitioner, Anisia Muthoni Njeru was settled and marked as closed through a consent dated 5/12/2023. This fact remains uncontroverted.

25. There is however, a dispute as to whether the amount owed to Faith Muthoni Mwenda, the 3rd petitioner of Kshs. 1,156,335/= was actually paid. The Company claims to have paid the entire sum as of 29/5/2020. The said petitioner, through her advocate, denies having received the funds. I have reviewed the payment instruction letters along with a cheque dated 29/5/2020, produced by the Company as annexure ELK 14, at pages 143 to 150, with respect to this petitioner. Notably, none of the payment instructions is accompanied by proof of actual payment. Furthermore, there is no evidence to show that the cheque was either deposited or sent to the petitioners' counsel.

26. The Official Receiver further notes that the claim relating to the 4th petitioner, Silas Muriuki Kinoti was paid in full. The claim by the 5th petitioner, Abel Mwangi, is subject of an appeal but that the entire decretal amount of Kshs.971, 220/= has been deposited in court. I do not see the petitioners to be controverting this fact.

27. Finally, the report indicates that the 6th petitioner, John Mwangi, is still owed Kshs. 2,117,827/=. Upon reviewing the Company’s documents, I find no evidence to suggest that this amount has been paid.

28. It is evident that the Company continues to owe significant sums to several petitioners, despite some payments being made toward settling certain claims. This partial compliance in my view, is clear evidence that the Company may in fact be solvent and capable of paying its debts but has chosen not to do so in full, to the detriment of the petitioners.

29. It is also evident that the process of opening the account has faced significant difficulties. While I fully recognize the severe ramifications a liquidation order could impose on the Company, as underscored by the Official Receiver, this court is obligated to weigh the Company’s interests against the legitimate rights of its creditors. The ultimate objective of insolvency proceedings should be to maximize the benefit for creditors, rather than dismantling the Company unnecessarily - especially if there remains a viable opportunity for its recovery.

Conclusion and Disposition 30. Accordingly, in an effort to strike a fair and delicate balance—and acknowledging the Company’s partial attempts to address its financial obligations, I hereby grant a 14-day lifeline to the Company with the directions that the said Kshs. 1,000,000/= be now deposited with the court as opposed to a joint interest earning account, within the said 14 days without exception.

31. In default thereof, the liquidation order shall automatically stand reinstated and the Official Receiver appointed as liquidator of the Company’s assets.

DATED, SIGNED AND DELIVERED IN NAIROBI THIS 17TH DAY OF SEPTEMBER 2024. F. MUGAMBIJUDGE