[2021] KEHC 242 (KLR)

Kimeto & Associates Advocates v KCB Bank Kenya Limited & 2 others (Insolvency Petition E004 of 2021) [2021] KEHC 242 (KLR) (Commercial and Tax) (19 November 2021) (Ruling)

Neutral citation: [2021] KEHC 242 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts)

Commercial and Tax

Insolvency Petition E004 of 2021

A Mabeya, J

November 19, 2021

IN THE MATTER OF THE COMPANIES ACT NO.17 OF 2015 AND IN THE MATTER OF THE INSOLVENCY ACT NO.18 OF 2015 AND IN THE MATTER OF MUMIAS SUGAR COMPANY LIMITED

Between

Kimeto & Associates Advocates

Petitioner

and

KCB Bank Kenya Limited

1st Respondent

Ponangipalli Venkata Ramana Rao

2nd Respondent

Mumias Sugar Company Limited

3rd Respondent

Courts can interfere with the decision of an administrator in insolvency proceedings if the decision was deemed to harm the interest of the public.

Reported by Ribia John

Insolvency Law– applicable law – cause of action arising before the enactment of the Insolvency Act - where the cause of action arose before the enactment of the Insolvency Act, No. 18 of 2015 - whether the Insolvency Act, 2015, was applicable to administrative receivers appointed before the repeal of the Companies Act Cap. 486 (repealed) – Insolvency Act, Act No. 18 of 2015, section 736. Insolvency Law– debentures – rights of debenture holders - whether the receiver of the assets of a company appointed by a debenture holder was entitled to the custody and control of the assets covered by that debenture - whether that receiver’s entitlement to custody and control was superior to a liquidator’s statutory right and duty to take the company’s property into his custody and under his control.Insolvency Law– public interest – public interest vis-à-vis the interests of creditors – social consequences of receivership - power of the court to interfere with a decision made by an administrator on public interest considerations - whether courts should consider public interest in exercising jurisdictional and discretionary powers in matters insolvency - whether, in insolvency proceedings, the court could interfere with a decision made by an administrator if the decision was deemed to harm the interest of the public - what should courts consider in balancing the conflicting interests between the decisions of an administrator and public interest when managing corporate re-organization process - whether the mandate of the court which encompassed having an eye for the social consequences of the receivership could override the lawful interests of secured creditors.Insolvency Law– creditors – secured creditors – rights of a secured creditor – rights of a secured creditor vis-à-vis an unsecured creditor in insolvency and winding up - what rights did a secured creditor have in winding – up and/or insolvency proceedingsInsolvency Law– receivership – purpose of receivership - administrative receiver – duties of a receiver – where a receiver was appointed by a debenture holder - whether receivership was constrained by a duty to consider the interests of the debtor or its creditorConstitutional Law– Senate – role of the Senate – oversight role of the Senate - where a company that had vested public interest was undergoing insolvency – separation of powers - whether the Senate could exercise oversight over an ongoing insolvency process and direct the receiver managers on their duties.Legal Practice-advocates– duties of an advocate –duty to observe the rule of law – duty to competently represent the client - whether advocates could be held personally liable for their actions while legally representing their clients - whether an advocate that was alleged to have advised a client to ignore a court order could be enjoined in the proceedings resulting from the breach of the court order.Constitutional Law– national values and principles – applicability of the national values and principles in the insolvency process – whether decision-making of administrators and other actors in the insolvency process were bound by the national values and principles – Constitution of Kenya, 2010, article 10. Civil Practice and Procedure– remedies – interim orders – where the court was functus offficio – supervision of orders which the court had already issued - what factors was the court to consider when issuing orders that required continued supervision by the court.Land Law– sale of property – lease of property – sale of property vis-à-vis lease of property - difference between a sale of property and acquiring a lease in a property.Words and Phrases– sale – definition of - the transfer of an absolute title to property for a certain agreed price - a contract between two parties one of whom acquires thereby a property in the thing sold, and the other parts with it for valuable consideration - Black’s Law Dictionary, 10th edition.Words and Phrases– lease – definition of - a contract by which a rightful possessor of real property conveys the right to use and occupy the property in exchange of consideration called rent. It could be for life, for fixed period or for a period terminable at will - Black’s Law Dictionary, 10th edition.

Brief facts Mumias Sugar Company Ltd (the company) was undergoing the process of receivership. The instant matter was a determination of four applications regarding the receivership process.The first application was dated September 28, 2021 sought orders to restrain the Senate from interfering in any manner with the company’s receivership particularly through summoning, directing and/or arresting the 2nd respondent (receiver). The grounds for the application were that the Senate Committee on Agriculture, Livestock and Fisheries (the said committee) had on several occasions sought to interfere with the receivership process by summoning the 2nd respondent and issuing him with directions on how to handle the receivership. The Senate Committee had subsequently summoned the 2nd respondent and required him to discuss several court cases pending before the courts and directed him to co-opt three members of the Senate Committee to participate in the receivership and revival process of the company. The respondents contended that the involvement of members of Parliament in a matter pending before court was against the doctrine of separation of powers and the directive was outside the powers of the Senate and contrary to the Constitution and the Companies Act.The second application was dated September 16, 2021 and was brought by Senior Counsel John Khaminwa, Advocate of Khaminwa & Khaminwa, Advocates, a supporting creditor. He sought leave of court to allow him to institute contempt of court proceedings against the 1st and 2nd respondents and their legal representatives. The application was based on the grounds that on October 17, 2019, the court issued a status quo order to the 1st and 2nd respondent pending determination of the petition and application before it; that the orders were disobeyed by the 1st and 2nd respondent on September 5, 2019 when they terminated all employee contracts. A second order dated November 6, 2019 restrained the 2nd respondent from selling the company’s immovable property until further orders. A third order was made on May 12, 2021 restraining the 2nd respondent and all concerned from disposing the movable assets of the Company except the sale of products to keep the Company in a trading position. It was contended that the 2nd respondent disobeyed the orders when he offered the entire company for long-term lease of up to 20 years. The orders of November 6, 2019 and May 12, 2021 had not been vacated or reviewed. The applicant further contended that the firm of Munyao, Muthama and Kashindi Advocates facilitated the disobedience of the orders by misleading the court on the activities of the 1st and 2nd respondent, providing false and misleading information to the 1st and 2nd respondent and sustaining parallel proceedings before other courts.The application was opposed by the respondents. The 1st respondent contended that the orders of November 6, 2019 and May 12, 2021 restrained the 1st respondent’s receiver manager from selling any of its immovable and moveable property respectively. That, the intended leasing process did not amount to a disposition or transfer of ownership of the assets and hence could not constitute sale of immovable or movable assets. The 2nd respondent denied selling any immovable or moveable assets in breach of the orders. The 2nd respondent explained that any lease entered into would not amount to a transfer of ownership of the assets in order to amount to a disposition or sale.The third application was dated June 20, 2016. It was brought by the petitioner (the applicant) and it sought to restrain the 1st and 2nd respondent or their proxies from leasing, selling, and/or dealing in any manner whatsoever with the immovable assets of the 3rd respondent (the Company) and an order to compel the 1st and 2nd respondent to table before court a detailed statement of account from the date of appointment of the 2nd respondent to date. The fourth application dated October 1, 2019 was lodged by the applicant. It sought, inter alia, an interim administration order against the company pending the determination of the insolvency petition and an order to compel the 1st respondent to join in the instant proceedings and submit to the court’s jurisdiction.

Issues

Whether the Senate could exercise oversight over an ongoing insolvency process and direct the receiver managers on their duties.

What was the difference between a sale of property and acquiring a lease in a property?

Whether advocates could be held personally liable for their actions while legally representing their clients.

Whether an advocate that was alleged to have advised a client to ignore a court order could be enjoined in the proceedings resulting from the breach of the court order.

Whether the Insolvency Act, Act No. 18 of 2015, was applicable to administrative receivers appointed before the repeal of the Companies Act Cap. 486 (repealed).

Whether in the instant case, the debentures created a charge over specific or all of the assets.

Whether receivership was constrained by a duty to consider the interests of the debtor or its creditor.

Whether the receiver of the assets of a company appointed by a debenture holder was entitled to the custody and control of the assets covered by that debenture. Whether that receiver’s entitlement to custody and control was superior to a liquidator’s statutory right and duty to take the company’s property into his custody and under his control.

What rights did a secured creditor have in winding–up and/or insolvency proceedings?

Whether courts should consider public interest in exercising jurisdictional and discretionary powers in matters insolvency.

Whether in insolvency proceedings, the court could interfere with a decision made by an administrator if the decision was deemed to harm the interest of the public

What should courts consider in balancing the conflicting interests between the decisions of an administrator and public interest when managing corporate re-organization process.

Whether the mandate of the court which encompassed having an eye for the social consequences of the receivership could override the lawful interests of secured creditors.

Under what circumstances would a court make an administration order?

Whether the decision-making of administrators and other actors in the insolvency process was bound by national values and principles.

What factors was the court to consider when issuing orders that required continued supervision by the court?

Whether the appointment of the 2nd respondent as receiver of the company was lawful.

Whether the debentures in the instant matter created a charge over specific or all assets of the Company.

Based on the facts of the instant case, whether an interim administration order could be issued to enjoin receiver managers and to restrain them from leasing the assets of the company.

Held

Pursuant to the letter, it was clear that there had been a meeting between the 2nd respondent and the Committee. The Committee advised the 2nd respondent to open the bids made in respect of the leasing of the company in the presence of bidders, to share the financial information with the bidders and the public and to extend an invitation to the Committee to attend the bid opening. The advice was given on the basis of the ruling of the High Court. The contents of the letter did not overreach. The Senate only was concerned with the compliance of the ruling of the court. When the application came up for the first time, the court made an order that the Committee’s direction that an invitation be extended to two of its members was not compulsive. It was a mere request and the court restrained the Senate from enforcing that request.

The court prevented the disposition of the property of the company. The disposition that would keep the property beyond the reach of the company when required. A sale was the transfer of an absolute title to property for a certain agreed price. It was a contract between two parties one of whom acquired a property in the thing sold, and the other parted with it for a valuable consideration. A lease was a contract by which a rightful possessor of a real property conveyed the right to use and occupy the property in exchange of consideration called rent. It could be for life, for fixed period or for a period terminable at will. A sale entailed a transfer of ownership while a lease conveyed the right of use and occupation of property for a certain period.

The bid invitation and report indicated that the intended lease was for a term not exceeding 20 years. The lease would not amount to a disposal that would create a title as defined under section 7(h) of the Land Act. The 1st and 2nd respondents act of leasing the assets did not amount to a breach of the orders of the High Court dated November 6, 2019 and May 12, 2021 respectively.

The relationship between the firm and the 1st and 2nd respondent was that of an advocate-client. The advocate’s actions were on behalf of his/her client. In that regard, advocates could not be held personally liable for their actions while legally representing their clients. However, that did not mean that an advocate could advise his client to blatantly ignore a court order and expect to go scot-free.

Where it was alleged that an advocate had advised his client/a party to ignore or breach a court order, it would be lawful to enjoin such an advocate to such proceedings for purposes of proving that the advocate participated, connived, encouraged and/or facilitated the contempt. The joinder would be with for the purposes of punishing such advocate. However, it had to be shown that the advocate participated in the breach or advised the party to breach the order in question. There was no breach in the instant case, there was no need to go into whether the law firm participated in or facilitated the alleged breach.

Section 690 of the Insolvency Act provided that an administrative receiver in relation to a company, meant; a receiver or manager of the whole (or substantially the whole) of the company's property appointed by or on behalf of the holders of any debentures of the company secured by a charge which, as created, was a floating charge, or by such a charge and one or more other securities. It also meant the holder of a floating charge in respect of a company's property could not appoint an administrative receiver of the company. Section 690 did not apply to the holder of a floating charge that was created before the commencement of the section or to an appointment of an administrative receiver made before that commencement. On the other hand, section 734(2) of the Act provided that despite the repeal of the Companies Act, or of Parts VI to IX of that Act, those Parts, and any other provisions of that Act necessary for their operation, continued to apply, to the exclusion of the Insolvency Act, to any past event and to any step or proceeding preceding, following, or relating to that past event, even if it was a step or proceeding that was taken after the commencement.

From the reading of section 734 of the Insolvency Act; with regard to the appointment of the applicants, who were appointed before the repeal of the Companies Act Cap. 486 (repealed), by dint of the transitional provisions of the Insolvency Act, 2015, the provisions of the Insolvency Act, 2015, and the Insolvency Regulations did not apply to the receivership or the receivers. The applicants having been appointed as receivers and managers of the 1st plaintiff prior to the commencement of the relevant parts of the Insolvency Act, the activities of the applicants as receivers and managers of the 1st plaintiff continued to be regulated under the Companies Act, Cap. 486 (repealed) to the exclusion of the Insolvency Act altogether.

The debentures produced by the 1st respondent clearly created a floating charge over the assets of the company. That empowered and/or enabled the 1st respondent to appoint a receiver over the assets of the company. The receiver manager was validly appointed not only under the debentures and the inter-lenders agreement but also the current insolvency laws which preserved the right to appoint a receiver manager under the old regime for transactions entered into before the new regime came into effect.

The notice of appointment of a receiver or manager dated September 20, 2019 filed with the Registrar of Companies indicated that the 2nd respondent was appointed as receiver manager over part of the property of the company as set out in the deed of appointment. The debentures registered in favour of the 1st respondent covered assets such as book debts, raw materials, finished goods and a fixed charge jointly held with the other lenders over Title No. XXYY. The receiver manager had the right to control and operate the assets mentioned in the various debentures and the inter-lenders agreement. Those were the factory, the co-generation plant and the ethanol plant on its own behalf as well as on behalf of the other secured lenders. That constituted the whole or substantially the whole of the company’s assets.

Both the parties and the court were for the revival and sustenance of the company as a going concern. It was for that reason that the instant court made two orders that restrained the disposal of the company’s assets.

The court had to consider the legal framework vis-à-vis the circumstances the company and all the actors found themselves in. Previously, the appointment of a receiver manager over a company was but a kiss of death to the concerned company. Never in the history of receivership in Kenya was any company in distress ever turned around. Receivership was a selfish, and destructive affair that was self-centered and concerned with the heavy remuneration of the concerned receiver and the appointing authority. Receivership was not constrained by any duty to consider the interests of the debtor or its creditor. It was a remedy designed to protect the interests of the security holder; preservation of the business was not its primary concern. Once appointed, there was no obligation for the receiver and manager to continue to trade.

A receiver of the assets of a company appointed by a debenture holder was entitled to the custody and control of the assets covered by that debenture. That entitlement to custody and control was superior to a liquidator’s statutory right and duty to take the company’s property into his custody and under his control. The secured creditor was entitled to stand outside the winding-up and to rely on his security, including his contractual right to appoint a receiver. A secured creditor was entitled to exercise its rights under the security document or statute in the event of default by the company. That power was not subject to insolvency proceedings commenced against the company by any other creditor. Further, an administrator or liquidator could not interfere with the exercise of those rights. A fortiori, any other creditor of the company could not intervene in the exercise of the secured creditor’s rights against the secured property. However, that position was changing.

The law of insolvency took the forms of a compact to which there were three parties: the debtor, his creditors and society. In consequence insolvency proceedings were not treated as an exclusively private matter between the debtor and his creditors, the community itself had always been recognized as having an important interest in them. In exercising their jurisdictional or discretionary power in matters insolvency, courts should consider public interest. Those were both financial and non-financial (equitable claimants). Financial claimants were the debtor, the creditors and the public while the equitable claimants were such groups as employees.

The court had a duty to interfere with a decision made by an administrator especially if the decision was to harm the interest of the public. Winding up a company affected many other entities and not just creditors and debtors. Whenever a petition to wind up a company was filed, many other social and economic entities were usually affected including the employees, the company suppliers as well as the customers.

In balancing the conflicting interests in managing the corporate re-organization process, it was in the public interest to: avoid premature liquidations. Restructuring schemes were a valuable mechanism to prevent them. Those entailed a temporary suspension of control or enforcement rights in order to provide an opportunity to establish the cause of the financial distress and evaluate the prospects of rehabilitation.

Protect the claims of various stakeholders such that there was no race to enforce individual claims to the detriment of other claimants.

Respect the statutory allocation of priority claims while allowing parties the opportunity to determine deferring their claims in anticipation of generating value for the long term.

Enhance access to information about the insolvent firm to allow for informed negotiation for an optimal solution.

Generate economic activity and create a going-forward business strategy that preserved creditors, workers and firms’ in specific economic investments to maximize the wealth of the entity.

The court in its supervisory capacity had a broader mandate. In a receivership such as the instant one, which worked well in to the social and economic fabric of a territory, that mandate had to encompass having an eye for the social consequences of the receivership too. Those interests could not override the lawful interests of secured creditors ultimately, but they could and had to be weighed in the balance as the process worked its way through. Public interest in insolvency law involved taking into account interests that society had regard for and that were wider than interests of those parties involved in a particular case, the debtor and creditors. Their interests often included non-financial interests.

In matters insolvency, the notion of public interest took center stage in determining resque re-organization and restructuring of companies that were in distress. It was no longer business as usual, creditors vs debtor. Interests of those who could be affected by the decision to be made took center stage. Courts had run administration and receivership parallel with each other. They had sought to protect the employees’ rights in distressed organizations. They had further considered and protected the rights of the communities living within the vicinity of the subject organizations or the communities whose social economic well-being would be affected by the folding of the subject entities.

The company was not just an ordinary business enterprise; it was the largest Sugar Company in the region. The court took judicial notice that its collapse would have dire social and economic consequences to the sugar belt (formerly known as Western Province).

The appointment of an interim liquidator of the company at the same time that the receiver and managers had been appointed by the debenture holders was not unknown in law. It would not be inconsistent with the power of the court in exercise of its jurisdiction as a companies court to appoint a liquidator in circumstances where debenture holder had also appointed a receiver. However, where possible, the receiver and the liquidator should be one and the same person.

The objects of the Insolvency Act, 2015 were set out in section 3. They included,inter alia, to enable insolvent companies to continue to operate as a going concern so that they could ultimately be able to meet their financial obligations in full or at least to the satisfaction of the creditors and to achieve a better outcome than were it to be liquidated. On the other hand, the objectives of administration were set out in section 52 of the Act. Those objectives were as set out under the Act and and they also included the realization the property of the company in order to make a distribution to secured or preferential creditors. An administration order was to be made only if the court was satisfied that the company was unable to pay its debts and if the order was reasonably likely to achieve an objective of administration. There was no clear roadmap as to how long the receivership would take place. The debt portfolio of the company to the secured creditors was at large. For example, while the 1st respondent claimed that as at October 31, 2019, the company’s debt to it stood at Kshs. 2,216,425,837/= and US$ 3,720,265/= which continued to attract interest, the last company accounts disclosed only a sum of Kshs 545,531,000/= as the amount due to the 1st respondent.

The court and the public did not know the actual debt portfolio of the company. To reach where the company was, the alleged facilities had to have become non-performing. There was a risk of breaching the in-duplum rule in respect of those facilities unless the 1st and 2nd respondents were forced to disclose certain matters about the debt portfolios of the company. The debt could be recovered eternally unless the 1st and 2nd respondents and the other secured lenders were brought to account. The operations of the company had so far been opaque. No one knew what was being done at the company. There were many who were interested in the equity of redemption of the company. All those could not be known with the opaqueness of the 1st and 2nd respondents. The company was unable to pay its debts.

Often than not, it had been a uniquely Kenyan experience that receivers and managers of companies placed under receivership dealt with the property of such companies without due regard to securing the best interest of both the secured and unsecured creditors. Receivers and managers in such instances acted as if the unsecured creditors had no rights worth protecting. In serving the interest of debenture holders, the receiver and managers had sold the property of companies under receivership without regard to the principle of transparency and accountability that required the receivers to secure the best possible price for the assets and the property of the company. Article 10 of the Constitution provided that national values and principles of governance not only bound public officers and state organs but also all persons whenever they made or implemented public policy decisions. Whereas the instant court was cognizant of the fact that the dealings between the 1st and 2nd respondents with the company were a private affair, the process of receivership was however, a matter of public interest. That was so because the rights of third parties e.g. unsecured creditors, sugar farmers and employees of the company were involved. Further, the company was a public body and matters touching on it were of public interest.

Considering that it was not clear what exactly the 1st respondent’s claim as well as the other lenders' claims were against the company, the period of receivership remained vague and at large. The court and the unsecured creditors were entitled to the disclosure. The period of receivership should also be certain. That could only be realized if the 1st and 2nd respondents were enjoined in those proceedings. That would also be achievable if an administration order was likewise made.

It was not until the applications had been heard in October 2021, that the 1st and 2nd respondent disclosed to court for the first time, the financial statements of the company ever since taking over in September 2019. The 1st and 2nd respondent could not be said to have been acting transparently. The court was bound to enforce the application of the national values and principles of accountability and transparency on the part of the 1st and 2nd respondent. Further, the court had to promote the application of the principles of equity and social justice when interpreting the Insolvency Act.

There was an element of public interest in the insolvency of the company. There was jurisdiction to run administration and receivership concurrently. The 1st and 2nd respondents had been unresponsive and they needed to be called to order. In calling them to order however, the court had to give deference to the 1st respondent’s rights as a secured creditor and not stifle any of its rights as such. That would also have applied to the other secured creditors. While giving public interest consideration, the court had to leave commerce to be undertaken and operated in an environment of freedom and certainty. The lenders had to be allowed the requisite freedom to realize their securities without unnecessary interference and/or inconvenience.

An administration order would issue. The 1st and 2nd respondent would be enjoined to the proceedings only for purposes of ensuring that they operated in a manner that was transparent, accountable and in good faith. It was imperative that the receiver and manager operated under the supervision of the Insolvency Court in order to take care of the public interest in an unhindered manner.

The rights of a secured creditor had to be upheld. The instruments appointing the 2nd respondent gave him the power to lease the assets of the company). Notwithstanding the length of the lease, the intention was to turn around the company so as to maximize on the recovery of the monies owed. A prima facie case with any probability of success was established.

The applicant would not suffer any loss that was irreparable and that could not be compensated by an award of damages. In any event, the balance of convenience lay with allowing the 2nd respondent to proceed with the leasing process so as to retain the company as a going concern.

At the hearing of the application, an inquiry from the applicant was made on what plans were in place to keep the company afloat. There was no satisfactory answer as to where the financing will come from, considering that the company was already insolvent. To the contrary, the 1st and 2nd respondent submitted that the leasing was meant to get a strategic investor who would be willing to inject capital into the company and run the same as a going concern. The proposed leasing was permitted but the 2nd respondent directed that in doing so, he should guard against the violation of the Competition Act, 2010 and should guard against monopolistic tendencies which could lead to a breach of the law.

Once a court determined a matter, it became functus officio. However, in the peculiar circumstances of the instant case, where the insolvency process was in force to enable a successful reconstruction of the company for the greater good, it would be necessary to give orders that, although interim, could require continued supervision by the court to safeguard the applicable constitutional values. The court took judicial notice that the continued sustenance of the company would or could assist the general public in the sugar belt to realize their social and economic rights enshrined in the Constitution. The primary one being the payment of that sugarcane farmers.

The court in issuing such orders, had to be realistic and avoid the temptation of judicial overreach, especially in matters of policy. The orders should not be couched in general terms, nor should they be addressed to third parties. Where necessary, a court of law could indicate that the orders it was issuing were interim in nature, and that the final judgment was to await the crystallization of certain actions. Since the 2nd respondent would be an officer of the court, for purposes of the rescue and re-organization of the company, it was expected that he would act in the best interest of the 1st respondent, then the other secured creditors, followed by the unsecured creditors and more importantly the public interest. The lessee of the company's assets was to be at his direction and control.

Applications partially allowed.

Orders

The application dated October 1, 2019 was partially successful as follows: The 1st and 2nd respondent were enjoined in the proceedings.

An administration order was issued against the company and consequently the 2nd respondent was appointed as the administrator thereof.

The receivership of the company would run concurrently with its administration.

The 2nd respondent was to continue to act as receiver manager of the company on behalf of the 1st respondent and as per his appointment but would also act as an administrator in addition thereto for purposes of reporting to the court on the administration of the company.

The application dated 28/6/2021 was dismissed save that the 2nd respondent was directed to the file with the court: - A detailed statement of account of all payments and receipts arising from the receivership of the company from the date of the appointment to date.

At intervals of six (6) months, to report to court on the operations of the company and present its financial accounts for the period in question.

File with the court within 60 days of the date hereof, a statement on the outstanding and the actual claims of all the secured creditors making disclosure as to the time the respective facilities became non-performing and the amount outstanding at the time.

The 2nd respondent was at liberty to proceed with the process of leasing the company's assets subject to strict observance of the Competition Act, 2010.

The application dated September 16, 2021 was dismissed save that the respondents were restrained from directing the 2nd respondent on how to carry out his obligations and conduct his business as the receiver manager of the company.

The application dated September 28, 2021 was dismissed in its entirety.

Since the matter touched on public interest, each party was to bear its costs.

Citations Cases East Africa Cables Plc v Ecobank Kenya Limited; SBM Bank (K) Limited (Interested Party) ([2020] eKLR) — Explained

Emirates National Oil Company (Singapore) Private Ltd v Triton Petroleum Co. Ltd ([2009] eKLR) — Explained

Giella v Cassman Brown ((1973) EA) — Followed

Kenya United Steel Company Limited v Kenya Commercial Bank Ltd & another ([2005] eKLR) — Explained

KSC International Limited (Under Receivership) & 5 others v Bank of Africa (K) Limited & 6 others ([2018] eKLR) — Explained

Medforth v Blake ((2000) Ch 86).)

Mitu-Bell Welfare Society v Kenya Airports Authority & 2 others; Initiative for StrategicLitigation in Africa (Amicus Curiae) ([2021] eKLR) — Followed

Radheshayam Transport Ltd v Corporate Business Centre Ltd ([2018] eKLR) — Followed

Willy Kimutai Kitilit v Michael Kibet ([2018] eKLR) — Explained

Lehman Brothers Australian Ltd (in Liquidation) v Lomas & Ors; The joint administrators of Lehman Brothers international (Europe) ([2020] EWCA Civ 321) — Explained

Re Pantmaenog Timber Co Ltd ((2004) A.C 158) — Explained

BNP Paribas v Jurong Shipyard Pte Ltd ([2008] SGHS 86) — Explained

China & South Sea Bank Ltd Vs Tan Soon Gin (Alias George Tan) ((1990) IAC 536)) — Explained

Re Anvil Range Mining Corporation, 1998 — Explained

Statutes Civil Procedure Act — section 1A, 1B, 3, 3A, 63; Order 10, 40; Rule 11, 3 — Interpreted

Civil Procedure Rules 2010 (2010 (sub-leg)) — Order 40, 41, 51 — Interpreted

Companies Act (Cap 486 Repealed) — section 348 — Interpreted

Competition Act (No.12 of 2010) — Interpreted

Constitution of Kenya, 2010 — article 10, 159 (2) — Interpreted

Insolvency Act (No. 18 of 2015) — section 734, 423 (1), 429 (1), 430, 431 (3), 531, 532, (1)(c)(d), 533 (a)(d)(f), 540, 690 — Interpreted

Insolvency Regulations 2016 — Rule 10 — Interpreted

Judicature Act (8) — section 3A — Interpreted

Land Act (No. 6 of 2012) — section 7 (h) — Interpreted

Texts Garner, BA., 2004, Black’s Law Dictionary (St Paul Minessota: Thomson Reuters 10th Edn)

Professor Janis Sarra 2003, Creditor Rights and the Public Interest: Restructuring Insolvent Corporations (University of Toronto Press;)

AdvocatesMr. Khaminwa (SC), Ms. Kimeto, & Mr. Ashitiva for for the County Government of KakamegaMr and Mrs. Kashindi for for the 1st & 2nd Respondent

Ruling

1. Mumias Sugar Company Ltd (hereinafter “the Company”), once heralded as the largest and most successful sugar manufacturing company in Kenya is now on its deathbed hoping for a lifeline. Before me are four applications for determination which in one way or the other may lead to its resuscitation or final death blow. I propose to determine them seriatim.

2. The first one dated 28/9/2021 sought orders to restrain the Senate from interfering in any manner with the 3rd respondent’s receivership particularly through summoning, directing and/or arresting the 2nd respondent.

3. The second one is dated 16/9/2021 and was brought by Senior Counsel John Khaminwa, Advocate of Khaminwa & Khaminwa, Advocates a supporting creditor. He sought leave of Court to allow him to institute contempt of court proceedings against the 1st and 2nd respondents and the firm of Munyao Muthama & Kashindi, Advocates.

4. The third application is dated 28/6/2021. It was brought by the Petitioner (“the applicant”) seeking to restrain the 1st and 2nd respondent or their proxies from leasing, selling, and/or dealing in any manner whatsoever with the immovable assets of the 3rd respondent (“the Company”) and an order to compel the 1st and 2nd respondent to table before court a detailed statement of account from the date of appointment of the 2nd respondent to date.

5. The fourth application dated 1/10/2019 was lodged by the applicant. It sought, inter alia, an interim administration order against the 3rd respondent pending the determination of the Insolvency Petition and an order to compel the 1st respondent to join in these proceedings and submit to this Court’s jurisdiction.

6. I will now deal with those applications in that order. The application dated 28/9/2021 was lodged by the 2nd and 3rd respondent. It was brought under section 348 of the Companies Act Cap 486 (Repealed), section 734 of the Insolvency Act 2015, Regulation 10 of the Insolvency Regulations 2016 and sections 1A and 1B of the Civil Procedure Act.

7. In the motion, they sought to have the Speaker of the Senate, The Clerk of the Senate, The Senate itself (“the Senate”) and the Inspector General of the National Police Service and their proxies restrained from summoning, directing, fining and/or arresting the 2nd respondent in matters dealing with the receivership of the Company and an order to set aside any directives, summons, orders and sanctions that have been imposed by the Senate.

8. The grounds for the application were that the Senate Committee on Agriculture, Livestock and Fisheries (“the said Committee”) had on several occasions sought to interfere with the receivership process by summoning the 2nd respondent and issuing him with directions on how to handle the receivership. That the Senate Committee had subsequently summoned the 2nd respondent and required him to discuss several court cases pending before the courts and directed him to co-opt 3 members of the Senate Committee to participate in the receivership and revival process of the company.

9. The said respondents contended that the involvement of Members of Parliament in a matter pending before Court was against the doctrine of separation of powers and the said directive was outside the powers of the Senate and contrary to the Constitution and the Companies Act.

10. It was further contended that standing order 98 of the Senate prohibits Senators from dealing with any matter active in court as the discussion of such matter is likely to prejudice its fair determination.

11. In response to the application, the Senate relied on the replying affidavit of Eunice Gichangi, the Deputy Clerk of the Senate, sworn on 30/9/2021.

12. She averred that the said Committee had met with the 2nd respondent and resolved that pursuant to the order of this Court (Okwany J) in Civil Suit No. E697 of 2021, the 2nd respondent should comply with the order of the Court as follows: -(a)Opening of bids made in respect to the Company be carried out on 30/9/2021 in the presence of the bidders;(b)Financial information contained in the bids be shared with the bidders and made available to the public; and(c)An invitation be extended to the said Committee to attend the bid opening

15. Further that the Senate was merely exercising its constitutional mandate. That it was not interfering with the receivership but merely exercising its oversight duties.

16. The court has considered the respective parties’ contentions and submissions. The respondents sought to restrain the Senate from directing the 2nd respondent on his duties as the receiver manager of the Company. The Senate on its part contended that it was only exercising its oversight role in accordance with the Constitution.

17. In the letter dated 29/9/2021, it is clear that there had been a meeting between the 2nd respondent and the said Committee on 27/9/2021. It shows that the Committee advised the 2nd respondent to open the bids made in respect of the leasing of the company in the presence of bidders, to share the financial information therein with the bidders and the public and to extend an invitation to the Committee to attend the bid opening. The advice was given on the basis of the ruling of Okwany J dated 23/9/2021 in HCC E697 of 2021: Gakwamba Farmers Cooperative Society Limited v Ponangipalli Venkata Ramana Rao.

18. Article 125 of the Constitution provides:-“(1)Either House of Parliament, and any of its committees, has power to summon any person to appear before it for the purpose of giving evidence or providing information.(2)For the purposes of clause (1), a House of Parliament and any of its committees has the same powers as the High Court—a.to enforce the attendance of witnesses and examine them on oath, affirmation or otherwise;b.to compel the production of documents; andc.to issue a commission or request to examine witnesses abroad.”

19. On the foregoing, it is clear that the contents of the letter dated 29/9/2021, did not over reach. The Senate only was concerned with the compliance of the ruling of the Court. When the application came up for the first time, this Court made an order that the Committee’s direction that an invitation be extended to 2 of its members was not compulsive. It was a mere request and this Court restrained the Senate from enforcing that request. That position obtains even now.

20. In view of the foregoing, save for the subsisting orders which are to subsist, the application dated 28/9/2021 is unfounded and is hereby dismissed.

21. The second application is the one dated 16/9/2021. The same was brought under section 5 of the Judicature Act; sections 3A and 63(c) of the Civil Procedure Act; Orders 10 rule 11 and 40 rule 3 of the Civil Procedure Rules.

22. In the motion, the applicant sought leave of Court to institute contempt of court proceedings against the 1st and 2nd respondents and the firm of Munyao Muthama & Kashindi Advocates (collectively referred to as “the respondents”). Further the applicant sought an order for the attachment of the property of the respondents and their committal to civil jail for a period of six months or as the Court may direct for disobeying the Court’s orders of 6/11/2019 and 12/5/2021, respectively.

23. The application was based on the grounds that on 17/10/2019, the Court issued a status quo order to the 1st and 2nd respondent pending determination of the petition and application before it; that the said orders were disobeyed by the 1st and 2nd respondent on 5/11/2019 when they terminated all employee contracts.

24. That a second order dated 6/11/2019 restrained the 2nd respondent from selling the Company’s immovable property until further orders. That a third order was made on 12/5/2021 restraining the 2nd respondent and all concerned from disposing the movable assets of the Company except the sale of products to keep the Company in a trading position.

25. It was contended that the 2nd respondent disobeyed the Orders on 16/4/2021 and 2/8/2021 when he offered the entire Company for long term lease of upto 20 years. That the orders of 6/11/2019 and 12/5/2021 had never been vacated or reviewed.

26. The applicant further contended that the firm of Munyao, Muthama and Kashindi Advocates facilitated the disobedience of the said orders by misleading the Court on the activities of the 1st and 2nd respondent, providing false and misleading information to the 1st and 2nd respondent and sustaining parallel proceedings before other courts.

27. That application was strenuosly opposed by the respondents. The 1st respondent filed Grounds of Opposition dated 23/9/2021. It contended that the orders of 6/11/2019 and 12/5/2021 restrained the 1st respondent’s receiver manager from selling any of its immovable and moveable property respectively. That, the intended leasing process did not amount to a disposition or transfer of ownership of the assets and hence cannot constitute sale of immovable or movable assets.

28. The 2nd respondent filed a replying affidavit sworn on 23/9/2021. He denied selling any immovable or moveable assets in breach of the orders of 6/11/2019 and 12/5/2021; respectively. That any lease entered into would not amount to transfer of ownership of the assets in order to amount to a disposition or sale.

29. Messrs Munyao, Muthama and Kashindi Advocates (the law firm) opposed the application vide a replying affidavit sworn on 23/9/2021 and a Preliminary Objection of even date.

30. In the Preliminary Objection, the law firm contended that it was wrongly joined into the proceedings since it was not a party to the insolvency petition but was only the legal representative of both the 1st and 2nd respondent. That the application disclosed no reasonable cause of action against the law firm since the Court could fully adjudicate upon the application without its presence as a party to the instant proceedings.

31. In the premises, the law firm submitted that its name be struck out as a respondent with costs to it.

32. The firm’s replying affidavit was sworn on 23/9/2021 by George Kashindi, a partner in the firm. It mirrored the contents of the preliminary objection. It further contended that the Court would be setting a dangerous precedent if it entertains the law firm as a party to the instant proceedings as it would allow law firms to be cited for alleged contempt of court yet their only role is to be legal representatives of parties to a suit.

33. The deponent denied that the 1st and 2nd respondent had disobeyed any court order and that therefore, there was no disobedience capable of being facilitated by the law firm as alleged. He urged that the application be dismissed.

34. The court has considered the contentions and the submissions of the respective parties. The question that falls for determination is whether the actions complained of amounts to disobedience of the orders made on 6/11/2019 and 12/5/2021, respectively.

35. It was the applicant’s submission that by offering the entire assets of the Company for a long lease of up to 20 years, the 1st and 2nd respondent were in contempt of the subject orders. The respondents contended otherwise.

36. I think it is important to set out what the two orders stated in order to understand whether there had been breach. The order of 6/11/2019 stated:-“ 3. That the Receiver Manager of KCB is hereby restrained from selling any immovable property of Mumias Sugar Company until further orders of the court.”While that of 12/5/2021 directed as follows:-“1. That in the interests of justice and for the company to remain afloat up to the time of hearing and determination of these proceedings, the Receiver Manager and all concerned are hereby restrained from any disposal of any moveable assets of the company.2. That this however does not prevent the Receiver Manager from operating the Company and selling those products that are meant to keep the company in trading position.i.e its products.3…4. ..”

37. .From the foregoing, it is clear that what the court did was to prevent the disposition of the property of the Company. The disposition that will keep the property beyond the reach of the Company when required.

38. The question therefore is whether the intended lease by the receiver manager amounts to a sale/disposition of immovable and movable assets of the Company. According to the Black’s Law Dictionary, 10th edition, sale is defined as:“The transfer of an absolute title to property for a certain agreed price__. It is a contract between two parties one of whom acquires thereby a property in the thing sold, and the other parts with it for a valuable consideration”.

39. The same text defines, a lease as:“A contract by which a rightful possessor of a real property conveys the right to use and occupy the property in exchange of consideration called rent. It can be for life, for fixed period or for a period terminable at will”.

40. It is clear from the foregoing that a sale entails a transfer of ownership while a lease conveys the right of use and occupation of property for a certain period.

41. In the Bid Opening Report on the leasing process which was filed by the 2nd respondent dated 25/10/2021 on the direction of this Court, it is noted at paragraph 3 that:“It has been made very clear to all bidders that the Leasing of Assets is different from sale of assets and in leasing of assets, the ownership of the assets does not pass to the Lessee while the same will be retained by MSCL (Mumias Sugar Company Limited”.

42. The bid document annexed as ‘JMK-07’ in the applicant’s supporting affidavit sworn on 16/9/2021 indicates that the 2nd respondent invited investors to lease any or all of the Company’s facilities for a mutually acceptable period and monthly lease rent. The wording of the bid invitation does not indicate an intention to fully dispose off the assets.

43. The applicant submitted that the proposed leasing falls within the definition of disposal under the Land Act particularly section 7(h).That provision states that a title to land may be acquired through a long term lease exceeding 21 years created out of private land.

44. The Court finds that the bid invitation and report clearly indicate that: the intended lease is for a term not exceeding 20 years. In that regard the lease would not amount to a disposal that would create a title as defined under section 7(h) of the Land Act. The court therefore finds that the 1st and 2nd respondent act of leasing the assets does not amount to a breach of the orders dated 6/11/2019 and 12/5/2021, respectively.

45. There was an issue as to whether the joinder of the firm Munyao Muthama & Kashindi Advocates as a respondent was proper. The applicant contended that the firm provided false and misleading information to the Court regarding the activities of the 1st and 2nd respondent and that the firm misled latter with the intention of disobeying clear orders of the court. Further, that the said firm had facilitated the disobedience of the orders by sustaining parallel proceedings before other courts.

46. In response, the firm contended that it was wrongly joined into the proceedings since it was not a party to the Insolvency Petition but was only the legal representative of both the 1st and 2nd respondent. Further, that the applicant had not raised a reasonable cause of action against the firm.

47. The relationship between the firm and the 1st and 2nd respondent is that of an advocate-client. The advocate’s actions are on behalf of his/her client. In that regard, advocates cannot be held personally liable for their actions while legally representing their clients. However, this does not mean that an Advocate can advise his client to blatantly ignore a Court order and expect to go scot free.

48. I am alive to the decision in Radheshayam Transport Ltd v Corporate Business Centre Ltd [2018] eKLR, where the court held that:-“Mr.Kennedy Wachira Mari, is the advocate who represented the Plaintiff in the suit. He cannot be held liable for the actions of his client unless there is evidence shown that he connived with the client.”

49. My view is where it is alleged, such as in this case, that an advocate has advised his client/a party to ignore or breach a court order, it will be lawful to enjoin such an advocate to such proceedings for purposes of proving that the advocate participated, connived, encouraged and/or facilitated the contempt. The joinder will be with for the purposes of punishing such advocate. However, it must be shown that the advocate participated in the breach or advised the party to breach the order in question.

50. Having found that there was no breach in this case, I need not go into whether the law firm participated in or facilitated the alleged breach.

51. The application is dismissed. Each party shall therefore bear own costs as the application was brought with a view to protect the sanctity of the court process.

52. The 3rd and 4th applications dated 1/10/2019 and 28/6/2021 were by the petitioner and will be considered jointly. The one of 20/6/2021 was brought under sections 423 (1), 429 (1), 430 and 431 (3) of theInsolvency Act 2015 and sections 1A, 3, 3A and 63 of theCivil Procedure Act. It sought to restrain the 1st and 2nd respondent from leasing, selling, and/or dealing in any manner whatsoever with the immovable assets of the company and to compel the said respondents to table in Court a detailed statement of account from the date of appointment of the 2nd respondent to date.

53. The second one dated 1/10/2019 was brought under order 40, 41 and 51 of the Civil Procedure Rules; section 531, 532 (1) c & d, 533 (a), (d) & (f) and section 540 of the Insolvency Act. In it, the applicant soughtinter alia, an interim administration order and the appointment of an interim administrator of the Company pending the determination of the Insolvency Petition and an order to compel the 1st respondent to join in these proceedings and submit to this court’s jurisdiction.

54. The grounds for the applications were that; the applicant filed the Insolvency Petition on 20/3/2019; by a Consent Order dated 1/8/2019, the Company was granted a moratorium of 3 months in order to negotiate with its creditors. Subsequently, 3 meetings were held in accordance with that order but the management of the Company was unable to provide a meaningful proposal on how the Company was to settle its debts.

55. Consequently, the creditors agreed to place the Company under administration strictly under the supervision of the Court aided by a Special Committee of Creditors on behalf of all creditors party to the Insolvency Petition. However, on 20/9/2019, the 1st respondent, purporting to be a secured creditor, appointed the 2nd respondent as a receiver manager during the moratorium to take over the assets of the Company.

56. The applicant contended that the receiver manager is not liable to the management of the Company nor its creditors or any other of its stakeholders who had earlier been involved in negotiations with the company. That the receiver manager may utilise the Company’s assets for the benefit of the secured creditors only with no recourse to the applicant or any of the unsecured creditors. That unless the Court intervened and stayed the unilateral appointment of the receiver manager the applicant would be prejudiced and will lose the protection of the Court.

57 .On the restraining order, it was contended that the Court gave orders restraining the 2nd respondent from selling both the immovable and movable assets of the Company which orders are still subsisting. That despite as such, the 1st and 2nd respondent intend to lease the assets and operations of the Company in disobedience of the said orders. That the receivership was shrouded in secrecy as the 1st and 2nd respondent had failed to disclose any information pertaining to the receivership.

58. It was the applicant’s contention that the 1st and 2nd respondent had not sought the Court’s approval prior to disposing the Company’s assets contrary to the provisions of the Insolvency Act 2015 (“the Act”). They should not be allowed to unilaterally deal with the assets of the Company to the exclusion of its creditors and stakeholders as well as the provisions of the Act.

59. The 1st and 2nd respondent opposed the applications vide a replying affidavit of Francis Kiranga, sworn on 5/11/2019 and grounds of opposition dated 28/6/2021.

60. They contended that, the 1st respondent had made various loan advancements to the Company which were secured by several debentures. That the debentures which were created on various dates between 1972 and 2013 had created floating charges over the assets of the Company and had empowered it to appoint a receiver or receiver and managers over the property charged.

61. They contended that the Act had preserved the right of appointment of receivers under section 690 as read with section 734 of the Act.That the negotiations held between stakeholders having borne no fruits, it was proper for it to take action and safeguard its interests.

62. That the appointment of the receiver was in good faith and was solely in order to secure its legal rights over the assets of the company as permitted by law. That the appointment of the receiver manager crystallized the security under the various debentures and that therefore the assets are not available for parallel control by an administrator if so appointed by the Court.

63. It was contended that the 1st respondent was not notified of the present application as required under section 532 of the Act which requires an applicant to notify holders of a qualifying floating charge of such fact. In the premises, the application should not be entertained. That the appointment of the receiver manager did not in any way undermine the liquidation process as a receivership and liquidation are separate and distinct procedures in law. That it would be unjust to remove a receiver manager who was validly appointed under debentures and replace him/her with an administrator proposed by unsecured creditors. The respondents therefore urged that the application be dismissed with costs.

64. In opposition to the application dated 1/10/2019, the 2nd respondent swore a replying affidavit on 5/11/2019. He stated that since his appointment, he had halted the continued vandalism and destruction of the property of the Company through security reinforcement. That it was not possible in law to appoint an administrator under the Act over a Company which a receiver manager has already been appointed as both administration and receivership are rescue mechanisms provided for under the Act. He was keen on engaging all stakeholders in order to reach a consensus on how to revive the Company.

65. In opposition to the application dated 28/6/2021, the 1st and 2nd respondent contended that the orders sought would be extremely prejudicial to the 1st respondent and all the stakeholders as they would defeat the revival efforts. That the grounds and facts raised were subjudice the application dated 1/10/2019.

66. It was further contended that the leasing of the assets was meant to bring in an investor to revive the operations of the Company which would benefit the local community and the creditors. That granting the orders sought would mean that the Company would remain dormant to the detriment of all stakeholders.

67. I have carefully considered the various affidavits on record together with the lengthy submissions by Learned Counsel. I have also considered the various authorities relied on by Learned Counsel. Having analysed the same, I consider the following to be the issues that arise for determination: -a)whether the appointment of the 2nd respondent as receiver of the company lawful;b)whether the debentures created a charge over specific or all assets of the Company;c)whether an interim Administration Order should be issued, the 1st and 2nd respondent enjoined in the proceedings and the restrained from leasing the assets of the company;d)whether an injunction should issue to restrain the leasing of the assets of the Company.e)what reliefs should be granted.

68. Initially, in the application of 1/10/2019, the applicant had contended that the 1st respondent had appointed the receiver manager unilaterally under questionable circumstances which was irregular. However, in the further affidavit of 19/6/2020. It was conceded that the 1st respondent was entitled to enforce its financial securities and appoint a receiver and manager.

69. It is not in dispute that the 1st respondent extended loan facilities to the Company. It is also not in dispute that the Company defaulted in the repayment of the said loans. In the premises, the 1st respondent was entitled to enforce its rights as per the law and the securities created by the Company. The subject debentures were produced at pages 1-113 of exhibit ‘FK1’ to the affidavit of Francis Kiranga sworn on 5/11/2019.

70. The 1st and 2nd respondent contended that the receivership was governed by the repealed Companies Act, Chapter 486 of the Laws of Kenya and not the Act. That the Insolvency Act did not do away with the appointment of receivers under the previous statutory regime but preserved that right under sections 690 and 734 of the Act.

71Section 690 of the Act provides:“In this section, "administrative receiver", in relation to a company, means“1(a) a receiver or manager of the whole (or substantially the whole) of the company's property appointed by or on behalf of the holders of any debentures of the company secured by a charge which, as created, was a floating charge, or by such a charge and one or more other securities; //(b)...2. The holder of a floating charge in respect of a company's property may not appoint an administrative receiver of the company.3. An appointment made in contravention of subsection (2) is void.4. This section does not apply to the holder of a floating charge that was created before the commencement of this section or to an appointment of an administrative receiver made before that commencement.”

72. On the other hand, section 734(2) of the Act provides:-“​​Despite the repeal of the Companies Act, or of Parts VI to IX of that Act, those Parts, and any other provisions of that Act necessary for their operation, continue to apply, to the exclusion of this Act, to any past event and to any step or proceeding preceding, following, or relating to that past event, even if it is a step or proceeding that is taken after the commencement.”

73. In KSC International Limited (Under Receivership) & 5 others v Bank of Africa (K) Limited & 6 others [2018] eKLR, Makau J held:“​​From the reading of section 734 of the Insolvency Act; as regard the Appointment of the Applicants, who were appointed before the repeal of the Companies Act cap 486, I find by dint of the transitional provisions of Insolvency Act, 2015, the provisions of the Insolvency Act, 2015, and the Insolvency Regulations do not apply to the receivership or the receivers herein. I am further of the considered view that the Applicants having been appointed as Receivers and Managers of the 1st plaintiff prior to the commencement of the relevant parts of the Insolvency Act, the activities of the Applicants as Receivers and Managers of the 1st plaintiff continued to be regulated under the Companies Act, cap 486 of the Laws of Kenya to the exclusion of the Insolvency Act altogether.”

74. I have considered the debentures produced by the 1st respondent. They clearly created a floating charge over the assets of the Company. That empowered and/or enabled the 1st respondent to appoint a receiver over the assets of the company.

75. In this regard, I am satisfied that the receiver manager was validly appointed not only under the debentures and the Inter-Lenders Agreement but also the current Insolvency Laws which preserve the right to appoint a receiver manager under the old regime for transactions entered into before the new regime came into effect.(b)Whether the debentures created a charge over specific or all of the assets.

76. The deed of appointment of the 2nd respondent as receiver manager was produced as ‘FK-2’ in the replying affidavit of Francis Kiranga sworn on 5/11/2019. Page 4 thereof states that the charged assets include, “All the Company’s undertaking, goodwill, book debts and property whatsoever and wheresoever both present and future including its uncalled capital for the time being.”

77. The Notice Of Appointment of a Receiver or Manager dated 20/9/2019 filed with the Registrar of Companies indicates that the 2nd respondent was appointed as receiver manager over part of the property of the Company as set out in the deed of appointment.

78. The debentures registered in favor of the 1st respondent cover assets such as book debts, raw materials, finished goods and a fixed charge jointly held with the other lenders over Title No. Mumias Sugar/Scheme2.

79. On the other hand, the Inter-Lenders Agreement of September 2010 between all the secured lenders who included the 1st respondent, Ecobank Kenya Ltd, Commercial Bank of Kenya Ltd, Ecobank Nigeria PLC, Proparco, Barclays Bank of Kenya Ltd and CFC Stanbic Bank Ltd, provides at Clause 5. 6 that:-“Each Lender agrees that it will ensure as far as possible without prejudice to its available rights under the Securities or Loan Agreement that the Factory, the Co-generation Plant and the Ethanol Plant are fully operated and that it shall procure that a receiver appointed by such Lender continues, as far as practicable, to operate the Factory, the Co-generation Plant and the Ethanol Plant as a going concern for so long as the Debts are outstanding to the Lenders.”

80. From the foregoing, it is clear that the receiver manager has the right to control and operate the assets mentioned in the various debentures and the inter-lenders agreement. These are; the factory, the co-generation plant and the ethanol plant on its own behalf as well as on behalf of the other secured lenders. This constitutes the whole or substantially the whole of the Company’s assets.(c) Whether an interim administration order should be made, the 1st and 2nd respondent enjoined in these proceedings and the receiver manager restrained from leasing the assets of the company.These are three issues in one.

81. In the application of 1/10/2019, the applicant prayed for an interim order of administration and appointment of an interim administrator in order to preserve the assets of the Company from further enforcement pending the determination of the Petition. On the other hand, in the application of 28/6/2021, the applicant sought that the 1st and 2nd respondent be restrained from leasing the assets of the Company.

82. It was contended by the applicant and the supporting creditors that, it was imperative that the 1st and 2nd respondent be enjoined in these proceedings. That if they are left to operate outside these proceedings, they are bound to act in an opaque manner to the detriment of the other creditors and they might ultimately run down the Company. Their position was that an administration order should be made and an administrator appointed to run the affairs of the Company. It was further forcefully contended and submitted that the intended leasing of the assets of the Company would defeat the rights of the unsecured creditors.

83. On their part, the 1st and 2nd respondent strenuously opposed the position taken by the applicant. They contended that their rights under the debentures were superior and should be upheld. That there was no legal basis for their being enjoined in these proceedings. That appointing an administrator would be futile as there would be no assets over which such administrator would superintend as all assets were under the management and possession of the 2nd respondent as receiver manager. That the intended leasing of the assets of the Company was an attempt to resuscitate the Company by getting a strategic partner to run the Company as a going concern. It was submitted that interfering with the duties of the 2nd respondent will send a very dangerous signal to the lending community as it will cause uncertainty in the realization of their securities in case of default.

84. It is common ground that at the commencement of these proceedings, the unsecured creditors and the Company held a couple of meetings with a view to come up with a rescue plan for the Company. It was amid these negotiations that the 1st respondent appointed the 2nd respondent to take over the operations of the Company pursuant to the debentures given by the Company.

85. One thing that run through the submissions of all the parties led by Mr. Khaminwa (SC), Ms. Kimeto, Mr. Ashitiva for the County Government of Kakamega, Mr and Mrs. Kashindi for the 1st and 2nd respondent, was that the Company should be saved. It should remain as a going concern and should not be given a kiss of death.

86. In this regard, it is common ground that both the parties and the court are for the revival and sustenance of the Company as a going concern. It is for this reason that this Court made two orders on 6/11/2019 and 12/5/2021 restraining the disposal of the Company’s assets. Further, on 31/8/2021 and 23/9/2021, Okwany J made certain directions in HCCC Comm No. E697 of 2021 Gakwamba Farmers Co-op Society Ltd vs Ponangipalli Venkata Ramana Rao & 6 others with a view to preserve the Company.

87. The first issue therefore is, whether an administration order should be made. This is in conjunction with the issue of whether the 1st and 2nd respondent should be enjoined in these proceedings.

88. In answering the two issues the Court has to consider the current legal framework vis a vis the circumstances the Company and all the actors find themselves in. Previously, the appointment of a receiver manager over a Company was but a kiss of death to the concerned Company. Never in the history of receivership in this Country was any Company in distress was ever turned around. Receivership was a selfish, and destructive affair that was only self-centred concerned with the heavy remuneration of the concerned receiver and the appointing authority.

89. Receivership was not constrained by any duty to consider the interests of the debtor or its creditor (see China & South Sea Bank LtdvsTan Soon Gin (Alias George Tan) (1990) IAC 536).It was a remedy designed to protect the interests of the security holder; preservation of the business was not its primary concern. Once appointed, there was no obligation for the receiver and manager to continue to trade (Medforth v Blake (2000) Ch 86).

90. This has been the position in insolvency matters and as echoed in the case East Africa Cables Plc v Ecobank Kenya Limited; SBM Bank (K) Limited (Interested Party) [2020] eKLR where the Court held:“Finally, and as regards the position of a receiver appointed under a debenture, the following statement of law by Street J., in Re Landmark Corporation Limited [1968] 1 NSWR 705 is apposite:‘the law is well-settled that a receiver of the assets of a company appointed by a debenture holder is entitled to the custody and control of the assets covered by that debenture …… This entitlement to custody and control is superior to a liquidator’s statutory right and duty …. to take the company’s property into his custody and under his control. The secured creditor is entitled to stand outside the winding-up and to rely on his security, including his contractual right thereunder to appoint a receiver.”The court continued:“Ifind that the law is settled that a secured creditor is entitled to exercise its rights under the security document or statute in the event of default by the company. That power is not subject to insolvency proceedings commenced against the company by any other creditor. Further, an administrator or liquidator cannot interfere with the exercise of those rights. A fortiori, any other creditor of the company cannot intervene in the exercise of the secured creditor’s rights against the secured property”

91. The court was reiterating the position as it were in 1968. It would seem however that that position is changing. In the United Kingdom and Canada, larger community and normative concerns over the processes and outcomes for insolvency processes have wielded influence over and above the private individual interests of creditors. These equitable and non-financial interests.

92. In Re Pantmaenog Timber Co Ltd (2004) A.C 158 at Paragraph 52, Lord Millet observed that: -“From the earliest days of the joint stock Company the liquidator has exercised functions which serve the public interest and not merely the financial interests of the Creditors and Contributories. The Cork Committee (Command 8558) observed (in paragraph 192 of its report) that: ‘The law of insolvency takes the forms of a compact to which there are three parties: the debtor, his creditors and society. In consequence insolvency proceedings have never been treated in English Law as an exclusively private matter between the debtor and his creditors, the Community itself has always been recognized as having an important interest in them.”

93. It is noted that the Cork Committee is the one that heralded the reform of the Bankruptcy Law in the United Kingdom. It led to the enactment of the UK Insolvency Act, 1986 which changed the manner in which re-organization in the corporate world and rescue process are undertaken. An element of public interest was introduced in rescue process that has remained salient to date.

94. In her work, Creditor Rights and the Public Interest: Restructuring Insolvent Corporations (Toronto): University of Toronto Press; 2003), Professor Janis Sarra poses that in exercising their jurisdictional or discretionary power in matters insolvency, courts should consider public interest. These are both financial and non-financial (equitable claimants). Financial claimants are the debtor, the Creditors and the public while the equitable claimants are such groups as employees.

95. The issue of public interest was first considered when Canada was restructuring its legislation. It was confirmed by the Supreme Court in Century Services v Canada (Attorney General) where the court affirmed the importance of public interest when looking into liquidation. It further noted that the purpose of CCAA (Companies Creditors Arrangement Act) was to enable the debtor to struggle through it financial difficulties with the aim of maintaining the business and avoiding both economic and social costs of liquidation. The CCAA is akin to our Insolvency Act, 2015.

96. In Lehman Brothers Australian Ltd (in Liquidation) v Lomas & Ors; The joint administrators of Lehman Brothers international (Europe) [2020] EWCA Civ 321 the issue was whether the courts have powers to intervene in the actions of its officers especially where there was unfairness against other people’s legal rights. The court held that it has a duty to interfere with a decision made by an administrator especially if the decision was to harm the interest of the public.

97. In the case of BNP Paribas v Jurong Shipyard Pte Ltd [2008] SGHS 86 it was acknowledged that winding up a company affects many other entities and not just creditors and debtors. It stated that whenever a petition to wind up a company is filed many other social and economic entities are usually affected they include the employees, the company suppliers as well as the customers.

98. In examining public interest in Canadian Corporate rescue under the Companies Creditors Arrangement Act, 1933 , (CCAA) Professor Sarra (supra) outlines some of the principles the Canadian courts have used in balancing the conflicting interests in managing Corporate re-organization process. According to her, it is in public interest to: -a.Avoid premature liquidations. Restructuring schemes are a valuable mechanism to prevent them. These entail a temporary suspension of control or enforcement rights in order to provide an opportunity to establish the cause of the financial distress and evaluate the prospects of rehabilitation.b.Protect the claims of various stakeholders such that there is not a race to enforce individual claims to the detriment of other claimants.c.Respect the statutory allocation of priority claims while still allowing parties the opportunity to determine deferring their claims in anticipation of generating --- value for the long term.d.Enhance access to information about the insolvent firm to allow for informed negotiation for an optimal solution, ande.Generate economic activity and to create a going forward business strategy that preserves creditors, workers and firms’ specific economic investments to maximize the wealth of the entity.

99. These are very apt principles and this court proposes to take them into consideration in determining this matter.

100. In Re Anvil Range Mining Corporation, 1998, the Court held: -“The court in its supervisory capacity has a broader mandate: In a receivership such as this one, which works well in to the social and economic fabric of a territory, that mandate must encompass having an eye for the social consequences of the receivership too. These interests cannot override the lawful interests of secured Creditors ultimately, but they can and must be weighed in the balance as the process works its way through.”

101. In the above case, faced with the difficult decision of balancing the superior Creditors’ rights to enforce their claims and the anticipated devastating social and economic impact of the firm’s demise, the court decided to run parallel receivership and the Companies Credit Arrangement Act. The court chose to allow simultaneous processes under its supervision.

102. In his works, Insolvency Law: A matter of Public Interest? (2005) 51 Northern Ireland Legal Quarterly 509 at 533, Andrew Keay poses that; public interest in Insolvency Law involves taking into account interests that society has regard for and that are wider than interests of those parties involved in a particular case, the debtor and creditors. Their interests often include non-financial interests.

103. From the foregoing it is clear that despite the endeavor to maintain the freedom in commercial transactions the courts in the commonwealth have moved further. In matters insolvency, the notion of public interest has taken the center stage in determining resque re-organization and restructuring of companies that are in distress. It is no longer business as usual, creditors vs debtor. Interests of those who may be affected by the decision to be made take center stage.

104. Courts have run administration and receivership parallel with each other. They have sought an protected the employees rights in the distressed organizations. They have further considered and protected the rights of the communities living within the vicinity of the subject organizations or the communities whose social economic well-being would be affected by the folding of the subject entities.

105. In the present case, the Company is not just an ordinary business enterprise, it was the largest Sugar Company in this region. The Court takes judicial notice that its collapse will have dire social and economic consequences to the Sugar belt (formerly known as Western Province). In this regard, while considering the competing interests of the creditors, the Court will take cognizance of the said fact and indeed adopt the principles enunciated by the Canadian Courts in Corporate rescue processes discussed in paragraph 98 above.

106 .The 1st and 2nd respondent contended that an administrator should not be appointed as his duties will clash with those of the 2nd respondent. On the other hand, the applicant and the supporting unsecured creditors contended that the 2nd respondent was acting in an opaque manner. That it was not clear for how long the receivership will be in place or whether they will ever recover anything.

107. In Emirates National Oil Company (Singapore) Private Ltd v Triton Petroleum Co. Ltd (2009) eKLR the court held: -“The appointment of an interim liquidator of the Company at the same time that the receiver and managers have been appointed by the debenture holders is not unknown in law. In Re Alvik Prestige Ltd (formerly known as Alvik Kenya Ltd) (2006) Eklr, Emukule J observed that it would not be inconsistent with the power of the court in exercise of its jurisdiction as a companies court to appoint a liquidator in circumstances where debenture holder has also appointed a receiver. He however recommended that where possible, the receiver and the liquidator should be one and the same person.

108. The objects of the Insolvency Act, 2015 are set out in section 3 thereof. These include, inter alia, to enable insolvent companies to continue to operate as a going concern so that they may ultimately be able to meet their financial obligations in full or at least to the satisfaction of the Creditors and to achieve a better outcome than were it to be liquidated.

109On the other hand, the objectives of administration are set out in section 52 of the Act. These are those of the Act and to realize the property of the Company in order to make a distribution to secured or preferential creditors. An administration order is to be made only if the Court is satisfied that the Company is unable to pay its debts and that if the order is reasonably likely to achieve an objective of administration.

110. It is clear that there is no clear roadmap as to how long the receivership will take place. The debt portfolio of the Company to the secured creditors is at large. For example, while the 1st respondent claims that as at 31/10/2019, the company’s debt to it stood at Kshs. 2,216,425,837/= and US$ 3,720,265/= which continue to attract interest, the last company accounts disclose only a sum of Kshs 545,531,000/= as the amount due to the 1st respondent.

111. It is imperative that the Court and the public knows the actual debt portfolio of the Company. Further, it is a known fact that to reach where the Company is, the alleged facilities to the secured must have become non-performing. There is risk of breaching induplum rule in respect of these facilities unless the 1st and 2nd respondent are forced to disclose certain matters about the debt portfolios of the company. The debt may be recovered eternally unless the 1st and 2nd respondents and the other secured lenders are brought to account.

112. Further, the operations of the Company has so far been opaque. No one knows what is being done at the Company. There are many who are interested in the equity of redemption of the Company. All these cannot be known with the present opaqueness of the 1st and 2nd respondent. The Company is unable to pay its debts.

113. The applicant submitted that the 1st and 2nd respondent should be enjoined in the current proceeding as they were acting opaquely. That they needed to be brought under the supervision of this Court. That they were engaged in wanton sale and disposal of the Company’s assets.

114. In the Emirates National Oil Company (supra), the court observed: -“More often than not, it has been a uniquely Kenyan experience that receivers and managers of Companies placed under receivership have dealt with the property of such Companies without due regard to securing the best interest of both the secured and unsecured Creditors. Receivers and managers in such instances have acted as if the unsecured Creditors have no rights worth protecting. In serving the interest of debenture holders, the receiver and managers have sold the property of Companies under receivership without regard to the principle of transparency and accountability that requires the said receivers to secure the best possible price for the assets and the property sold of such Company.”

115. Article 10 of the Constitution provides that national values and principles of governance not only bind public officers and state organs but also all persons whenever they make or implement public policy decisions. Whereas this Court is cognizant of the fact that the dealings between the 1st and 2nd respondent with the Company is a private affair, the process of receivership is however, a matter of public interest. This is so because the rights of 3rd parties e.g. unsecured creditors, sugar farmers and employees of the Company are involved. Further, the Company is a public body and matters touching on it are of public interest.

116. Further, considering that it is not clear what exactly the 1st respondent’s claim as well as the other lenders claims are against the Company, the period of receivership remains vague and at large. The court and the unsecured Creditors are entitled to the disclosure. The period of receivership should also be certain. These can only be realized if the 1st and 2nd respondent are enjoined in these proceedings. This will also be achievable if an administration order is likewise made.

117. It is apt to point out that, it was not until the applications had been heard in October 2021, that the 1st and 2nd respondent disclosed to Court for the first time, the Financial Statements of the Company ever since taking over in September 2019. The 1st and 2nd respondent cannot be said to have been acting transparently.

118. In Kenya United Steel Ltd v KCB Ltd (2005) eKLR. The Court of Appeal held: -“Perhaps we need only refer to this Court’s decision in Hastings Irrigation Ltd v the Standard Chartered Bank Ltd & other (1987) KLR 280 in which it was held that it was the above principles for the Court to interfere in the passage of the receivership unless it could be shown that the conduct of the receivers and managers was seriously oppressive, or not in accordance with the recognized principles of law and of Commercial practice, or that there were clear and compelling reasons to do so.”

119Further in Willy Kimutai Kitilit v Michael Kibet [2018] eKLR, the Court of Appeal held:-“By Article 10 (2) (b) of the Constitution of Kenya, equity is one of the national values….which binds the courts in interpreting any law (article 10 (1) (b). Further, by article 159 (2) (e), the courts in exercising judicial authority are required to protect and promote the purpose and principles of the Constitution.”

120. This court finds that it is bound to enforce the application of the national values and principles of accountability and transparency on the part of the 1st and 2nd respondent. Further, the court must promote the application of the principles of equity and social justice when interpreting the Insolvency Act.

121. Accordingly, I hold that both the 1st and 2nd respondent are bound by the Constitutional principles of transparency and accountability. These can only be achieved if the two are brought under the jurisdiction and supervision of this court.

122. I have already found that there is an element of public interest in the insolvency of the Company. That there is jurisdiction to run administration and receivership co-currently. That the 1st and 2nd respondent have been unresponsive and they need to be called to order.

123. In calling them to order however, the Court shall give deference to the 1st respondent’s rights as a secured creditor and not stifle any of its rights as such. This will also apply to the other secured creditors. While giving public interest consideration, the Court must leave commerce to be undertaken and operated in an environment of freedom and certainty. The lenders must be allowed the requisite freedom to realize their securities without unnecessary interference and/or inconvenience.

124. In this regard, an administration Order will issue. The 1st and 2nd respondent will be enjoined to the proceedings for purposes only ensuring that they operate in a manner that is transparent, accountable and in good faith. As was held in theRe Anvilcase (supra), it is imperative that the receiver and manager operates under the supervision of the Insolvency Court in order to take care of the public interest although in an unhindered manner.

125. As regards the injunction sought, the law is clear that the rights of a secured creditor must be upheld. The instruments appointing the 2nd respondent give him the power to lease the assets of the Company (See Clause 10 of the Debenture). As it is already noted, notwithstanding the length of the lease, the intention is to turn around the Company so as to maximize on the recovery of the monies owed. I do not think a prima facie case with any probability of success was established.

126. As regards the second limb ofGiella v Cassman Brown (1973) EA, the applicant will not suffer any loss that is irreparable and that cannot be compensated by an award of damages. In any event, the balance of convenience lies with allowing the 2nd respondent to proceed with the leasing process so as to retain the Company as a going concern.

127. At the hearing of the application, the Court inquired from the applicant what plans were in place to keep the Company afloat. The Court asked where the financing will come from, considering that the Company is already insolvent. There was no satisfactory answer to the said inquiry.

128. To the contrary, the 1st and 2nd respondent did submit that the leasing is meant to get a strategic investor who will be willing to inject capital into the Company and run the same as a going concern.

129. The Court being mindful of all the foregoing, it will permit the proposed leasing but direct the 2nd respondent that in doing so, he should guard against the violation of the Competition Act, 2010. That he should guard against monopolistic tendencies which may lead to the breaching of the law.

130. In view of the foregoing, the question that arise is the form of orders to be made. I am alive that once a Court determines a matter, it becomes functus officio. However, in the peculiar circumstances of this case, where the insolvency process is in force to enable a successful reconstruction of the Company for the greater good, I opine that it would be necessary to give orders that, although interim, may require continued supervision by the court to safeguard the Constitutional values alluded to above. The Court takes judicial notice that the continued sustenance of the Company would or may assist the general public in the sugar belt to realize their social and economic rights enshrined in the Constitution. Primary of them is the payment of that sugarcane farmers.

131. In Mitu-Bell Welfare Society v Kenya Air Ports Authority & 2 Others (2021) eKLR, the Supreme Court of Kenya held that there was jurisdiction for a Court to issue interim reliefs, structural interdicts and supervisory orders. It held: -“Most importantly, the Court in issuing such orders, must be realistic and avoid the temptation of judicial overreach, especially in matters policy. The orders should not be couched in general terms, nor should they be addressed to third parties-----Where necessary, a Court of Law may indicate that the orders it is issuing are interim in nature, and that the final judgement shall await the crystallization of certain actions.”

132. Although the Supreme Court was dealing with a Constitutional matter touching on the bill of rights, I believe that the said holding will hold true in the circumstances of this case.

133. In this regard, since the 2nd respondent will henceforth be an officer of this court, for purposes of the rescue and re-organization of the Company, it is expected that he will act in the best interest of the 1st respondent, then the other secured creditors, followed by the unsecured creditors and more importantly the public interest. That the lessee of the Company's assets shall be at his direction and control.

134. In the premises, the court determines all the said applications and makes interim orders as follows: -a.The application dated the 1/10/2019 is partially successful as follows: -i.the 1st and 2nd respondent are hereby enjoined in these proceedings.ii.An administration order is hereby issued against the Company and consequently the 2nd respondent is duly appointed as the administrator thereof.iii.The receivership of the Company will run concurrently with its administration.iv.For the avoidance or any doubt, the 2nd respondent shall continue to act as receiver manager of the Company on behalf of the 1st respondent and as per his appointment but will also act as administrator in addition thereto for purposes of reporting to this Court on the administration of the Company.b.The application dated 28/6/2021 is dismissed save that the 2nd respondent is directed to the file with the Court: -i.A detailed statement of account of all payments and receipts arising from the receivership of the Company from the date of the appointment to date.ii.At intervals of six (6) months, to report to Court on the operations of the Company and present its financial accounts for the period in question.iii.File with the court within 60 days of the date hereof, a statement on the outstanding and the actual claims of all the secured creditors making disclosure as to the time the respective facilities became non-performing and the amount outstanding at the time.c.The 2nd respondent is at liberty to proceed with the process of leasing the Company's assets subject to strict observance of the Competition Act, 2010 Laws of Kenya.d.The application dated 28/9/2021 is dismissed save that the Senate and its Officers are hereby restrained from directing the 2nd respondent on how to carry out his obligations and conduct his business as the receiver manager of the Company.e.The application dated 16/9/2021 is dismissed in its entirety.f.Since the matter touched on public interest, each party is to bear own costs.It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF NOVEMBER, 2021. A. MABEYA, FCI ArbJUDGE