[2023] KEHC 26368 (KLR)

Shanghavi & another v Victoria Commercial Bank Ltd & another (Civil Case E006 of 2022) [2023] KEHC 26368 (KLR) (Commercial and Tax) (8 December 2023) (Ruling)

Neutral citation: [2023] KEHC 26368 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Civil Case E006 of 2022

FG Mugambi, J

December 8, 2023

Between

Jayesh Umedlal Shanghavi

1st Plaintiff

Nina Jayesh Shanghavi

2nd Plaintiff

and

Victoria Commercial Bank Ltd

1st Defendant

The Good Earth (Group) Ltd (in Administration)

2nd Defendant

Ruling

Background 1. This ruling determines the Chamber Summons application dated 13th October 2022, brought under sections 1A & 1B of the Civil Procedure Act and Order 1 rule 10(2), 14 and 25 of the Civil Procedure Rules. The 2nd defendant seeks the following orders:i.This Honourable Court be pleased to strike out The Good Earth (Group) Limited (In Administration) as a defendant in the suit.ii.The cost of this application and entire suit be borne by the plaintiffs.

2. The application is premised on the grounds on the face of it and the supporting affidavit sworn by HARVEEN GADHOKE, the administrator of the 2nd defendant.

3. The dispute before the court arises out of a loan agreement in which the applicant, a limited liability company currently under administration, obtained various loans amounting to Kshs. 975,000,000/= from the 1st defendant. The plaintiffs, who are the directors of the applicant, issued personal guarantees and indemnities for Kshs. 4,020,000,000/- together with their property described as L.R. No. 5934/2 Nairobi (the suit property) as security. This was around 2015.

4. Fast forward to 11th November 2021 when the 1st defendant, through Kenya Shield Auctioneers, issued a notice of its intention to sell the charged property in recovery of the outstanding loan amount of KES 1,086,221,617. 79. This is what led to this suit in which the plaintiffs seek a permanent injunction against the sale of the charged property, an order for accounts of amounts owing and that parties do consider an amicable settlement.

5. Going back to the application, the applicant’s main contention is that the orders sought in the suit are only against the 1st defendant. The applicant distances itself from any claim or interest in the suit property and from any role in the charging of the property to the 1st defendant. The applicant therefore argues that the plaintiffs have no cause of action against them as evidenced in the plaint. Even if they did, the applicant further argues that the plaintiffs filed this suit without consent of the administrator or leave of Court as required under section 560 of the Insolvency Act, 2015.

6. In opposing the application, the plaintiffs filed a joint replying affidavit sworn on 15th January 2023 in which they confirmed being guarantors to the facilities offered to the applicant by the 1st respondent. They also confirmed ownership of the suit property which was security for the performance of the applicant’s loan obligations to the 1st defendant. The plaintiff however deposed that the applicant had offered to enter into a settlement agreement with the 1st defendant, by paying Kshs. 470,000,000/= in full settlement of its outstanding obligations and in consideration of the discharge of the securities given including the charged property and the guarantees.

7. The plaintiffs aver that the administrator, HARVEEN GADHOKE, who was appointed by the 1st defendant, has recovered a substantial amount of the debt and taken over various properties of the applicant which amounts have not been disclosed to the Court. They argue that these amounts have not been credited towards the loan.

8. The 1st and 2nd plaintiffs also contend that the applicant is a necessary party to the suit for the reason that it was the principal borrower and its presence would assist the Court to determine the dispute.

9. The application was canvassed through written submissions. The applicant’s submissions are dated 21st February 2023 while the 1st and 2nd plaintiffs filed written submissions dated 19th July 2023. The 1st defendant neither filed a response nor submissions as it took no position on the application.

Analysis 10. I have carefully considered the pleadings, submissions as well as the authorities cited by Counsel in support of their depositions. The first issue for determination is whether whether the plaintiffs’ suit against the 2nd defendant is incompetent for want of compliance with Section 560 (1) (d) of the Insolvency Act.

11. The applicant cited the cases of Lambert Lwanga Ogochi & 4 Others V Ponangipalli Venkata Rao & 9 Others, (HCC E004 of 2022) and Malplast Industries Limited V NCBA Bank Kenya PLC as well as Harveen Gadhoke (Suing as Administrator of Malpast Industries Limited) (Administrator), [2022] eKLR, for the proposition that the approval of the Court is required in relation to a person who wishes to begin or continue legal proceedings against a company in administration.

12. I must concur with the applicant noting that it is a well settled principle of law that when a company is under administration, a suit may only be instituted or continued only with the consent of the administrator or with the Court’s approval. Section 560 (1)(d) of the Insolvency Act is instructive on the point and provides as follows:“(1)While a company is under administration—(d)a person may begin or continue legal proceedings (including execution and distress) against the company or the company's property only with the consent of the administrator or with the approval of the Court.”

13. This provision ought to be understood within the objective of administration which is to give the company a second chance while securing and balancing the interests of its creditors. The rationale for the moratorium on legal proceedings is that while a company is under administration, the administrator is allowed to perform his duties in the interest of all the company’s creditors, without distraction from unnecessary and potentially expensive litigation.

14. This was enunciated by the Court in Cook V Mortgage Debenture Ltd, [2016] EWCA Civ 103 cited with approval in Hoggers Limited (In Administration) V John Lee Halamandres & 11 Others, [2021] eKLR. The Court comprehensively discussed the rationale for the role of the moratorium against legal proceedings and the need for leave in the following words:“In the case of liquidation and bankruptcy, the purpose of these provisions is essentially twofold. First, given that the property of the company or individual stands under the statute to be realised and distributed, subject to any existing interests, among the creditors on a pari passu basis, the moratorium prevents any creditor from obtaining priority and thereby undermining the pari passu basis of distribution.Second, given that both a liquidation and bankruptcy contain provisions for the adjudication of claims by persons claiming to be creditors, the moratorium protects those procedures and prevents unnecessary and potentially expensive litigation. In circumstances where the potential liability of the company or bankrupt is best determined in ordinary legal proceedings, as for example is often the case with a personal injury claim, the court will give permission for proceedings to be commenced or continued, but usually on terms that no judgment against the company or individual can be enforced against the assets of the estate.In the case of an administration, this is not a sufficient description of the purposes of the moratorium in paragraph 43(6). An administration may be a prelude to a liquidation or, once an administrator gives notice of an intention to make distributions to creditors, may become a substitute for a liquidation. In such circumstances, the purposes described above apply also to the moratorium in the case of an administration. But before that point is reached, the principal purpose of an administration is either to rescue the company itself as a going concern or to preserve its business or such parts of its business as may be viable.The purpose of the moratorium is to assist in the achievement of those purposes. The moratorium on legal process against the property of the company best preserves the opportunity to save the company or its business by preventing the dismemberment of its assets through execution or distress. The moratorium on legal proceedings serves the same purpose by preventing the company from being distracted by unnecessary claims. As Nicholls LJ put it in Re Atlantic Computer Systems plc [1992] Ch 505 at 528, the moratorium provides "a breathing space". Once again, however, the court will readily give permission for proceedings to be commenced or continued where it is appropriate to do so.”

Determination and final orders 15. Since it is not controverted that the applicant is under administration and that the plaintiffs have not sought leave of this Court or the administrator’s consent to continue this suit as against the applicant, I find that the suit as against the applicant is irregular. I also find that the issue of whether the applicant is a necessary party is premature and cannot be addressed at this stage.

16. The upshot is that the application dated 13th October 2022 is merited and it is hereby allowed in the following terms:i.The suit is struck out as against the applicant with no orders as to costs.ii.The plaintiffs are at liberty to file an application for leave and obtain consent of the administrator to enjoin the applicant to this suit.iii.The applicant shall have the costs of the application.

DATED, SIGNED AND DELIVERED IN NAIROBI THIS 8THDAY OF DECEMBER 2023. F. MUGAMBIJUDGE