[2009] KEHC 4 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA

AT NAIROBI

MILIMANI COMMERCIAL COURTS

WINDING UP CAUSE NO.2 OF 2009

IN THE MATTER OF RIFT VALLY RAILWAYS (K) LIMITED

AND

IN THE MATTER OF THE COMPANIES ACT CHAPTER 486 LAWS OF KENYA

RIFT VALLEY RAILWAYS (K) LIMITED...................................................................................APPLICANT

AND

KENYA SHELL LIMITED.........................................................................................................RESPONDENT

RULING

The applicant and the respondent had a business relationship by which the respondent supplied to the applicant various petroleum products, including bulk diesel extra. The respondent supplied to the applicant the said petroleum products on credit for agreed specified periods. The petroleum supply agreement was in writing. It is dated 1st March 2007. From the affidavit sworn by the managing director of the applicant in support of the present application, it is apparent that the applicant experienced financial difficulties which resulted in the applicant failing to fulfill its financial obligations to the respondent, among suppliers. The respondent demanded that the applicant pays for the petroleum products that had been supplied to it. From correspondence exchanged between the applicant and the respondent, it was evidence that the applicant had on several occasions sought to be indulged by the respondent. The applicant made several promises to pay the then outstanding amount of Kshs. 314,066,949. 39. in all instances, the applicant failed to honour its promises.

On 4th November 2008, the respondent issued a twenty one (21) day notice to the applicant to pay the then outstanding amount of Kshs. 335,803,224/= failure to which the respondent would commence winding up proceedings in court pursuant to section 220of the Companies Act.On 16th January 2009, the respondent presented to court a winding up petition. In its petition, the respondent averred that the applicant had either neglected or failed to pay the said sum of Kshs. 335,803,224/= despite the statutory noticed to wind up the company being issued. The respondent was of the view that the applicant was insolvent and unable to pay its depts. And it would be just equitable to wind up the applicant company.

Upon being made aware of the winding up proceedings that had been filed by the respondent, the applicant did on 10th February 2009 file a notice of motion pursuant to the provisions of Rule 3 of the Companies (High Court) Rules and section 3A of the Civil Procedure Act seeking an order of the court to restrain the respondent from advertising in the Kenya Gazette or in any other newspaper the winding up petition that had been presented to the court. The applicant further prayed that the said petition presented to the court by the respondent be dismissed with costs to the applicant. The grounds in support of the application are on the face of the application. In summary, the applicant is of the view that the petition had been presented to court and prosecuted by the respondent in abuse of the due process of the court. The applicant stated that if the respondent was allowed to proceed with the advertisement of the winding up petition, it would be irreparably prejudiced as its reputation as a financially sound company would be irredeemably damaged to an extent that it would result in the collapse and destruction of the company’s business. The applicant urged the court to consider the general interest of the large public in determining whether it was desirable for the winding up petition to be advertised.

It was further the applicant’s case that since the supply of petroleum products agreement between the applicant and the respondent contained a clause that mandated any dispute between itself and the respondent be resolved by arbitration, the court should refer the dispute to arbitration. The applicant contends that since the dept was bona fide disputed, the same cannot constitute a basis for winding up proceedings. The applicant further stated that the petition was in any event incurably defective on account of procedural defects and failure to comply with mandatory requirements of the law. The applicant urged the court to either stay the proceedings herein pending the resolution of the dispute by arbitration or alternatively dismiss the winding up proceedings commenced by the respondent.

The respondent objected to the application and duly filed grounds in opposition thereof. The respondent, inter alia, stated that the notice of motion was bad in law since it did not dispute the fact that the applicant owed certain sums of money to the respondent. The respondent was of the view that the applicant was estopped from denying that it owned the amount demanded by the respondent in light of its admission of the amount owned. It was the respondent’s case that the there existed an arbitration clause in the supply agreement did not preclude it from seeking to invoke the jurisdiction of this court under the Companies Act and the Companies (Winding Up) Rules. The respondent contends that the application lacked legal substratum and was in fact made in a vacuum. The respondent urged the court to dismiss the application as it had failed to lay sufficient basis for a case for dismissal of petition. The respondent urged the court to dismiss the application with costs.

At the hearing of the application, I heard submissions made by Mr. Marete for the applicant and by Mr. Majanja for the respondent. I have carefully considered the said rival arguments. I have also considered the authorities cited by learned counsel in support of their respective opposing positions. The issue for determination by this court is whether the applicant established a case to enable this court restrain the respondent by means of an injunction from proceedings with the winding up petition and further stay proceedings herein. If I understood the applicant’s case correctly, it is the applicant’s contention that the respondent was not justified in law to file winding up proceedings in view of the fact that the debt was disputed and in light of the arbitration clause in the supply agreement. It was further the applicant‘s case that the respondent had abused the due procedure of the court when it filed the present winding up proceedings.

The principles to be considered by this court in determining whether or not to grant the prayers sought by the applicant are more or less settled. In Halsbury’s Laws of England, 4th Edition, Vol. 7 (3) 2004reissue at paragraph 452 which states as follows:

“A winding up order may not be made on a debt which is disputed in good faith by the company; the court must see that the dispute is based on a substantial ground. A dispute as to the precise amount due is not a sufficient answer to the petition. If there is a genuine dispute, the petition may be dismissed or stayed, and an injunction may be granted restraining the advertisement or publicizing of the petition. Where a petition has not been presented but is threatened in respect of the disputed debt, an injunction may be granted restraining the presentation. If the debt is not genuinely disputed on some substantial ground, the court may decide this question on the petition, but it will usually dismiss a petition grounded on a disputed debt and leave the dispute to be decided in an action (or claim). The court may order the amount of the alleged debt to be paid into court. Where the judgment for the debt on which the petition is presented is reversed before the hearing, the petition may be dismissed. It is an abuse of the process for a petition to be presented on the basis of an unascertained debt which has never been demanded and for which no opportunity to repay has been given.”

In Re a company (No 008725 of 1991 and No 008727 of 1991) [1992] BCLC 633 It was held that for an application to restrain a winding up petition to be successful, it had to be established that the debt was disputed in good faith and on substantial ground. It would not suffice for the company to argue that an investigation is yet to be undertaken that may produce grounds on which the debt can be disputed.

It would appear that, at least in Kenya, the circumstances under which winding up petitions may be filed has been circumscribed. For instance, in the matter of Re Bentley Travel Ltd Nairobi HC W.C No. 5 of 1999(unreported) Onyango Otieno J (as he was then) held that a winding up petition ought not be preferred in the case where the petitioner has a remedy in filing a claim in court against the company for such alleged debt. He was of the opinion that the winding up provisions of the Companies Act should not be used to blackmail companies through threat of preferring winding up proceedings every time a Company disagrees with a would be creditor or every time a company denies indebtedness. In Re Lucton Kenya Ltd Nairobi HC W.C No. 20 of 1997 (unreported) Aganyanya J(as he was then) held that where the company has made proposals to liquidate the outstanding amount by installments, it would not be sufficient ground for the creditor to allege that such proposal was proof that the company was unable to pay its debts. In Re Mugoya Construction & Engineering Co. Ltd Nairobi HC W.C. No. 30 of 2004(unreported) Azangalala J held that for a petitioner to have Locus Standi to file a petition to wind up a company on the ground of its inability to pay a debt, conclusive proof must be presented to the court that the debt owed to the petitioner by the company was undisputed and further that the company has been unable to pay the said undisputed amount.

In the present application, it is evident that the applicant owes the respondent at least the sum of Kshs. 314,066,949. 39. The fact that the respondent claims a higher figure of Kshs. 335,803,224/= does not means that the respondent has not established that it is at least owed the said sum of Kshs. 314,066,949. 39. Under Section 219(e) of the Companies Act, a company may be wound up if it is established that the company is unable to pay its debts. Section 220 of the Companies Act defined what constitutes inability to pay a debt. Under Section 220(a) of the Act, a company will be deemed to be unable to pay its debts if a demand has been made for the payment of the sum owed, and within three (3) weeks thereof, the said amount that has been demanded is not paid.

In the present application, apart from setting out a litany of its financial woes, the applicant has not categorically denied that it owes, at least the said amount of Kshs. 314,066,949. 39, to the respondent. It appears that the thrust of the applicant’s application is that, the respondent having in the near past agreed to indulge it from paying the outstanding amount, then the respondent should be estopped from demanding the payment of any outstanding amount. With the greatest respect to the applicant, I think the applicant has failed to lay any legal basis for its application. The fact that the respondent had in the past waived its right to demand immediate payment of the amount then owing does not imply that the respondent cannot resort to legal action if it forms the opinion that the applicant is giving it the run around.

I am in agreement with the submission made on behalf of the respondent that the fact there exists an agreement with an arbitration clause does not oust this court’s jurisdiction to entertain a winding up cause under the provisions of the Companies Act and the Companies (Winding Up) Rules. Indeed, an arbitrator does not have jurisdiction to entertain any winding up proceedings if the same would be presented to him. Having perused the pleading filed by the parties herein, it is clear that the payment demanded by the respondent is bone fide. The applicant has failed to raise any substantial ground to entitle this court decline to proceed with the winding up proceedings. The fact that the applicant is experiencing financial difficulties is not sufficient reason to restrain the respondent from proceeding with this winding up cause. I think, with respect to the applicant, that the present application was filed to buy time and to forestall the inevitable: that a time has to come when the applicant will have to pay the amount that it owes to the respondent for goods sold and supplied to it its own request. The fact that the applicant operates a vital communication link in the country will not distract this court from reaching a decision that in its opinion will do justice to the parties. The fact that the applicant operates the only railway service in the country is more the reason why it should be held up to its legal obligation to pay its debts. I was not persuaded by the argument advanced by the applicant that the respondent had committed procedural errors in its petition that rendered the petition incurably defective.

The upshot of the above reasons is that the notice of motion dated 10th February 2009 lacks merit and is hereby dismissed with costs. The respondent shall be at liberty to proceed with the winding up cause. The interim orders issued pending the hearing of the present application are hereby set aside.

DATED AT NAIROBI THIS 23RD DAY OF September 2009.

L.KIMARU

JUDGE