[2022] KEHC 15438 (KLR)

Mutungi & another v Africa Merchant Assurance Company Limited (Insolvency Cause 001 of 2021) [2022] KEHC 15438 (KLR) (6 October 2022) (Ruling)

Neutral citation: [2022] KEHC 15438 (KLR)

Republic of Kenya

In the High Court at Machakos

Insolvency Cause 001 of 2021

GV Odunga, J

October 6, 2022

IN THE MATTER OF AFRICA MERCHANT ASSURANCE COMPANY LIMITED AND IN THE MATTER OF THE INSOLVENCY ACT NO. 18 OF 2015 AND IN THE MATTER OF THE INSOLVENCY REGULATIONS 2016

Between

Grace Muthoki Mutungi

1st Petitioner

Daniel Mutungi Mutua

2nd Petitioner

and

Africa Merchant Assurance Company Limited

Respondent

Ruling

1. The Petitioners herein, Grace Muthoki Mutungi and Daniel Mutungi Mutua, by Creditor’s Petition dated August 30, 2021, expressed to be brought under Section 425 of the Insolvency Act, 2015 (hereinafter referred to as “The Act”) seeks that Africa Merchant Assurance Co Ltd (hereinafter referred to as “the Company”) be declared insolvent and liquidated under the provisions of the Insolvency Act, No 18 of 2015. It is further sought that the Court appoints the Official Receiver as the Liquidator and that the costs of the petition be borne by the said Company.

2. According to the petition, the Company as at July 23, 2021 was justly and truly indebted to the petitioner (and remains so indebted) in the aggregate sum of Kshs 3,322,058. 50 (the debt Amount) being the decretal sum in Chief Magistrate’s Court, Machakos Civil Suit No 148 of 2020 in which the company was declared to be bound to satisfy the judgement in Chief Magistrate’s Court, Machakos Civil Suit No E277 of 2021. It was disclosed that the Petitioners do not, nor does any person on their behalf, hold any security on the company’s assets for the payment of the said amount. It was stated that despite repeated requests made by the Petitioners to the Company for the payment or part payment of the debt amount, the company has failed or neglected or refused to pay the debt amount.

3. According to the Petitioners, the debt amount owed to them by the Debtor Company is within the prescribed insolvency level in accordance with the Insolvency Act, 2015 and that more than twenty-one days have lapsed since August 4, 2021 when the petitioners served statutory demand for payment on the company but the company has failed to pay the debt or any part of the debt or comply with the statutory demand. It was averred that there is no application to set aside the statutory demand pending before this honourable court or any other court.

4. The Petitioners therefore pleaded that since the company is unable to pay its debts, it is just and equitable that the company should be liquidated.

5. The petition was supported by an affidavit in which the foregoing averments were reiterate. Apart from that there was a further affidavit in which the Petitioners averred that under the provisions of Section 121 of the Insurance Act, a Petition for the winding up of an Insurance company ought to be served upon the Commissioner of Insurance (Now Insurance Regulatory Authority). However, there is no requirement for joinder of the Commissioner of Insurance (now Insurance Regulatory Authority) into the proceedings for winding up or liquidation. In the Petitioners’ view, solvency margins or compliance with regulatory requirements is not the issue for determination in these proceedings but the Respondent’s inability or refusal to pay the debt owing to them.

6. They also took the view that under the provisions of Section 432 of the Insolvency Act, a Petition cannot be rendered fatally defective for failure to serve other creditors since what ought to be served under Section 423 (3) thereof is the liquidation order and not the Petition.

7. The Petitioners further averred that contrary to the assertion by the Respondent, it is a matter of public notoriety that:-a.There have been several attempts to wind up the Respondent, as shown by the annexed Business Daily article dated November 27, 2020. b.The Insurance Regulatory Authority has recently fined the Respondent for failing to comply with statutory requirements as shown by the annexed The Star Newspaper article dated January 12, 2022. c.The Respondent has a history of failing to pay claims as shown by the annexed The Star Newspaper article dated March 10, 2020. d.Respondent’s offices have been reduced to a shell with no operating furniture where by even employees sit on desks after the chairs were carted away in execution for failure to settle claims.

8. The Petitioners averred that while the Respondents contend that the decree giving rise to these proceedings is contested; no such evidence has been tendered and that the decree has not been reviewed, set aside or appealed against. In their views, the instant proceedings are neither draconian nor drastic since the Respondent has failed, refused and neglected to pay the decretal sum. It was their case that the balance of convenience tilts in favor of liquidating an Insurance company that fails to pay claims but continues to receive premiums.

9. It was pointed out that:-a.The Respondents were aware of Civil Suit No 148 of 2020 at the Chief Magistrate’s Court at Machakos (The primary suit) since they acknowledged receipt of the notice of institution of suit, summons, plaint, verifying affidavit and supporting documents vide the letter dated July 2, 2020. b.The Respondents were aware and were notified of Civil Suit No 277 of 2021 at the Chief Magistrate’s Court at Machakos (The declaratory suit).c.The Respondents were served with the statutory demand herein on August 4, 2021 but failed, refused and neglected to comply therewith.

10. It was averred that the proceedings herein are therefore the only resort the Petitioners have to recover the rightfully obtained judgment in their favor. The Petitioners disclosed that despite being hoodwinked that the company was willing to settle the claim giving rise to the instant proceedings, the Respondent has gone back on its word and has not even made an attempt at liquidating the sum owing even by reasonable installments.

11. The Court was therefore urged to allow the Creditor’s petition dated August 30, 2021 as prayed.

The Respondent’s Answer to the Petition 12. In response to the petition, the Respondent, on December 9, 2021, filed the Answer to Creditors’ Petition dated December 7, 2021. According to the Respondent/Company, the petition was fatally defective for failure to join the Commissioner of Insurance as mandatorily required under Section 121 of the Insurance Act. It was further averred that for the purposes of Section 424(1)(e) of the Insolvency Act, 2015, the allegations that the Company is unable to pay the Creditors’ alleged debt of Kshs 3,332,058. 58 fails the statutory muster prescribed under section 121 as read with section 41 of the Insurance Act. According to the Respondent, the Creditors have neither pleaded that the Company has failed to meet the capital adequacy ratio or solvency margins prescribed under Section 41 and 42 of the Insurance Act and neither has evidence been tendered to prove the same to the applicable standard. In its view, no evidence of non-compliance with any regulatory requirements under the Insurance Act or at all has been tendered nor proved against the Company as to warrant the draconian action of liquidating the Company as alleged and that the Creditors have failed to provide any proof that a Statutory Demand (properly drawn) was served on the Company.

13. According to the Respondent Company, under section 432(3) of the Insolvency Act, a Liquidation Order once made ought to be executed in favour of all creditors of the company in order of priority as set out under the Second Schedule to the Insolvency Act. Accordingly, all proceedings relating to the Creditors prior to and before making a liquidation order ought to be served on all creditors. It was therefore averred that the petition is fatally defective for non-compliance with this requirement.

14. It was contended that it is a matter of public notoriety that the Company is one of the largest insurance companies in Kenya with a wide customer base and that the alleged debt the subject of the petition is not even sufficient or equitable reason to warrant the draconian and disproportionate action of liquidating the Company. To the Respondent, held against the legislative and public interest objects of section 3 of the Insolvency Act that enjoins this Court to strive and sustain companies as going concerns rather than wind them up, the petition, if allowed will occasion disproportionate prejudice to the Company and all interested stakeholders, (including employees and the insured public) relative to the benefits, if any, that would emanate from a liquidation order.

15. The Company averred that in so far as the sums claimed by the Creditors arose out of insurance claims, the same ought to be pursued through established modes of execution of decrees and that insolvency proceedings are in the circumstances disproportionately draconian, unwarranted and superfluous.

16. It was averred that the decrees annexed to the petition were contested and that no efforts have been made by the Creditors to pursue an amicable settlement of the claim. It was reiterated that the debt of the insolvency proceedings herein is disputed and that the petition is an abuse of court process and is singularly intended to embarrass the Company and coerce it into settling disputed claims.

17. In the Company’s view, it would be inequitable and disproportionately prejudicial to the interests and rights of the shareholders, the insured public, company employees and other creditors of preferential ranking and thereby inimical to the legislative objects of liquidation set out under section 3 of the Insolvency Act, 2015, to liquidate the Company on the grounds advanced in the petition.

18. According to the Respondent Company, the petition is otherwise precipitous and/or has been filed in ignorance of alternative regulatory steps and procedures available in law or management and resolution of disputes of the nature alleged in the Petition.

19. The Respondent therefore urge the Court to strike out or dismiss the petition and in the alternative direct the parties to settle accounts under supervision of the Court for further directions or make such further orders as it deems necessary that would be proportionate and just in the circumstances. It also sought for the costs of the proceedings.

Determination 20. Under section 424(1)(e) of the Insolvency Act, 2015, a company may be liquidated by the Court if it is unable to pay its debts. It is clear that this is the provisions upon which the petition is based.

21. Section 425(1) of the Act states that:-An application to the Court for the liquidation of a company may be made any or all of the following:(a)the company or its directors;(b)a creditor or creditors (including any contingent or prospective creditor or creditors);(c)a contributory or contributories of the company;(d)a provisional liquidator or an administrator of the company;(e)if the company is in voluntary liquidation-the liquidator.

22. In this case, the Petitioners have brought this petition in their capacities as creditors. The Black’s law Dictionary defines Creditors as;-“one to whom a debt is owed, one who gives credit for money or goods also termed debtee.”

23. Section 2 of the Act however defines “creditor” and “debtor” as follows:“creditor" includes a person entitled to enforce a final judgment or final order."debtor" means a natural person who owes money to one or more creditors; and, if a trust, partnership or other unincorporated body owes money to a creditor, includes all of the trustees of the trust, all of the partners of the partnership and all of the members of the body;

24. In this case, it is contended by the Respondent Company that the debt the subject matter of these proceedings is disputed. In Re Tanganyika Produce Agency Limited HCMCC No 6 of 1957 [1957] EA 241, it was held that:“It is now well settled that a petition for winding up with a view to enforcing payment of a disputed debt is an abuse of the process of the court, and should be dismissed with costs… If it is shown that an alleged dispute is not a bona fide one the objection to the petition fails. Thus it is not uncommon for a company, after again and again begging for time for payment of a debt, to spring on the petitioner at the last moment the assertion that the debt is a disputed one. Such defence is naturally open to great suspicion and meets with no favour from the court…A winding up petition is not to be used as machinery to try common law action…A winding up order cannot be obtained by a person claiming unliquidated damages, his proper course being to change the claim for damages into a judgement and thus make himself a creditor; or by a judgement creditor who has attached a debt due from the company to his judgment debtor, his proper course being to obtain judgement in action and then petition.”

25. Similarly, it was held in Re Hoima Ginners Ltd (No 2) Kampala HCCC No 3 of 1964 [1964] EA 439 that:“A petitioning creditor seeking a winding up order founded on unliquidated damages should first establish with certainty what the quantum of damages is and must make himself a creditor by changing his claim into a judgement before he can petition. A winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company. A petition will be dismissed, and under circumstances may be stigmatised as a scandalous abuse of the process of the court.”

26. The same position was adopted by Ringera, J (as he then was) in Re Standard Ltd, Ex Parte Tricom Paper International BV [2002] 2 KLR 644, in which he expressed himself as follows:“The Companies court must not be used as a debt collecting agency, nor as a means of bringing improper pressure to bear on a company. The effects on a company of the presentation of a winding up petition against it are such that it would be wrong to allow a machinery designed for such petitions to be used as a means of resolving disputes which ought to be settled in ordinary litigation, or to be kept in suspense over the company’s head while that litigation is fought out. When a petition is based on a debt, which is disputed on substantial grounds, the petitioner is not a “creditor” within the meaning of the Companies Act who has the locus standi requisite for the presentation of the petition, even if the company is in fact insolvent. Again,. The existence of a dispute on substantial grounds as to the existence of any debt defeats the contention that the company has within the meaning of the Act “neglected” to pay the sum required by the statutory notice. In the context of a notice requiring a person to do some act, it cannot be said that the person “neglects” to do that act if the reason for not doing it is a genuine and strenuous contention, based on substantial grounds, that the person is not liable to do the act at all. If there is liability, a failure to discharge that liability may well be “neglect” whether it is due to inadvertence or obstinacy or dilatoriness; but a challenge to liability is a challenge to the foundation on which any contention of “neglect” in relation to an obligation must rest…When the creditor’s debt is clearly established it, it follows that the court would not, in general at any rate, interfere even though the company would appear to be solvent, for the creditor would, as such, be entitled to present, a petition and the debtor would have his own remedy in paying the undisputed debt which it should pay. So, to persist in non-payment of the debt in such circumstances would itself either suggest inability to pay or that the application was an application that the court should give the debtor relief which it itself could provide, but would not provide, by paying the debt. Further the winding up order on the ground of inability to pay debts would be the very matter which it would be for the companies court to decide after presentation of the petition; and validly to present a creditor’s petition which the company explicably would not pay could hardly, in general at any rate, be an abuse of the process of the court. Where it is established that there is no debt, it follows that there is no creditor, that the person claiming to be such has no locus standi and that the petition is bound to fail and once that becomes clear, pursuit of the petition would be an abuse of the process of the court, and the court would restrain its presentation or advertisement. Where the debt is disputed by the company on some substantial ground (and not just on some ground which is frivolous or without substance and which the court should, therefore ignore) and the company is solvent the court will restrain the prosecution of the petition to wind up the company since winding up is not a remedy intended by the ;legislature, or that ought ever to be applied, to enforce payment of a debt where these circumstances exist – solvency and a disputed debt… It is therefore clear that if a petition is intended to enforce payment of a disputed debt, it will be treated as an abuse of the process of the court and will be struck out. However, the dispute must be predicated on substantial grounds and is not constituted by the mere fact of an affirmation by the creditor on the one hand and a denial by the debtor on the other hand.”

27. It therefore follows that where a debt is genuinely disputed, it cannot be the basis for commencing insolvency proceedings against a company. However, where no such dispute exists, the Company cannot, by merely stating that the debt is disputed escape the snare of such proceedings. In other words, to escape being consumed by insolvency proceedings, the Company must show that the dispute regarding the said debt is bona fide.

28. In this case, it is contended by the Petitioners that the Company was at July 23, 2021 was justly and truly indebted to the petitioner (and remains so indebted) in the aggregate sum of Kshs 3,322,058. 50. This debt arose from the decree in Chief Magistrate’s Court, Machakos Civil Suit No 148 of 2020, the proceedings whereof the Respondent was well aware of. These proceedings, it was averred, gave rise to Chief Magistrate’s Court, Machakos Civil Suit No E277 of 2021 which was a declaratory suit. This contention has not been expressly denied. Apart from bare allegations of the existence of a dispute, no evidence has been placed before me to support such an allegation. On the other hand, the Petitioners have exhibited a copy of the decree in Machakos CMCC No E277 of 2021 between Grace Muthoki Mutungi and Daniel Mutunga Mutua versus Africa Merchant Assurance Company Limited in which judgement was entered for the Petitioners herein against the Respondent in the sum of Kshs 3,141,576. 90 with costs and interests. There is no evidence that the said decree has been satisfied.

29. In the foregoing circumstances I find no basis for claiming that the said debt is disputed.

30. The Respondent has further contended that the petition was fatally defective for failure to join the Commissioner of Insurance as mandatorily required under Section 121 of the Insurance Act. That section provides as follows:For the purpose of section 384 of the Insolvency Act, 2015, an insurer is taken to be unable to pay its debts if at any time the requirements of section 41 (which relate to margins of solvency) are not observed by the insurer.

31. Section 384 of the Insolvency Act, 2015 provides that:(1)For the purposes of this Part, a company is unable to pay its debts—(a)if a creditor (by assignment or otherwise) to whom the company is indebted for hundred thousand shillings or more has served on the company, by leaving it at the company’s registered office, a written demand requiring the company to pay the debt and the company has for twenty-one days afterwards failed to pay the debt or to secure or compound for it to the reasonable satisfaction of the creditor;(b)if execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or(c)if it is proved to the satisfaction of the Court that the company is unable to pay its debts as they fall due.(2)A company is also unable to pay its debts for the purposes of this Part if it is proved to the satisfaction of the Court that the value of the company’s assets is less than the amount of its liabilities (including its contingent and prospective liabilities).(3)The insolvency regulations may increase or reduce the amount specified in subsection (1)(a).

32. A reading of both provisions clearly shows that a judgement creditor has two grounds under which he can seek an order of insolvency against the debtor. The first one is pursuant to Section 384(1)(b) by showing that execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part. In other words, the Creditor is required to take out execution proceedings against the Insurance and upon failing to recover the debt by that process, commence insolvency proceedings. The other option is to prove to the Court that the Insurance Company is unable to pay the debt in question. In that event, section 41 of the Insurance Act kicks in and the Creditor has to prove that the margins of solvency thereunder are not observed by the insurer.

33. In the mater before me here is no allegation that execution or other process issued on a judgment, decree or order of any court in favour of the Petitioners has returned unsatisfied in whole or in part. In fact, there is no allegation or evidence that the execution process was ever commenced by the Petitioners against the Respondent Company. In light of that, the petition can only succeed against the Respondent if the Petitioners satisfy the Court that the margins of solvency under section 41 of the Insurance Act are not observed by the Respondent. No such evidence has been placed before me in this case.

34. In my view the safeguards placed by the aforesaid provisions are geared towards the achievement of the objects of the Act as set out particularly in 3(1)(c) of the Act viz:(c)in the case of insolvent companies and other bodies corporate whose financial position is redeemable—(i)to enable those companies and bodies to continue to operate as going concerns so that ultimately they may be able to meet their financial obligations to their creditors in full or at least to the satisfaction of those creditors; and(ii)to achieve a better outcome for the creditors as a whole than would likely to be the case if those companies and bodies were liquidated.

35. In order to resort to insolvency particularly where the interest in the Company, such as an insurance company, go beyond those of the individual creditor, I agree that it would be inequitable and disproportionately prejudicial to the interests and rights of the shareholders, the insured public, company employees and other creditors of preferential ranking and thereby inimical to the legislative objects of liquidation set out under section 3 of the Insolvency Act, 2015, to liquidate the Company on the grounds advanced in this petition without first attempting the execution process.

36. In the foregoing premises, I find this petition unmerited and dismiss the same but with no order as to costs.

37. It is so ordered.

G V ODUNGAJUDGERULING READ, SIGNED AND DELIVERED IN OPEN COURT AT MACHAKOS THIS 6TH DAY OF OCTOBER, 2022M W MUIGAIJUDGEDelivered the presence of: