[2024] UGHCCD 63

## **THE REPUBLIC OF UGANDA IN THE HIGH COURT OF UGANDA AT KAMPALA (CIVIL DIVISION) MISCELLANEOUS CAUSE NO. 0154 OF 2023**

# **CIVTEC AFRICA LIMITED ::::::::::::::::::::::::::::::::::::::::::::::::::: APPLICANT VERSUS MANTRAC UGANDA LIMITED ::::::::::::::::::::::::::::::::::::::::: RESPONDENT**

### **BEFORE: HON. JUSTICE BONIFACE WAMALA RULING**

### **Introduction**

[1] This application was brought by Notice of Motion under Sections 4 and 5 of the Insolvency Act 2011, Section 98 of the CPA, Section 33 of the Judicature Act and Regulations 4, 5 and 6 of the Insolvency Regulations seeking orders that;

- a) The Respondent's statutory demand dated 10th July 2023 and issued to the Applicant on 21st July 2023 be set aside. - b) The costs of the application be provided for.

[2] The grounds upon which the application is based are summarized in the Notice of Motion and also set out in the affidavit in support of the application deposed by **Ms. Peace Kabashaho**, the Applicant's Finance Manager. Briefly, the grounds are that on 23rd September 2021, the Applicant and the Respondent entered into a Standardized Equipment Rental Agreement where the Respondent was to rent out Caterpillar earth moving machines to the Applicant for a period of six months at an agreed daily hire rate and on the basis of the hours of usage of the equipment. The parties subsequently made an addendum to provide for more machines and to extend the period for an additional four months. The deponent stated that during the performance of the agreement, there were unforeseen events which inhibited operations on the site like rain, fuel shortage in the country, equipment breakdown; which reduced sales generating capacity and caused financial loss. She further stated that the repetitive occurrence of the incidents grew a disparity between the Applicant and Respondent's computation of the hours of usage of the equipment and, in computing outstanding the sum, the Respondent has not taken into account the legitimate concerns raised by the Applicant and has instead issued several demand notices to the Applicant with contradicting figures.

[3] The deponent also stated that the Respondent's actions have occasioned grave financial loss to the Applicant to a tune of USD 558,280.88 which the Applicant counterclaims from the Respondent. The Applicant thus disputes all the debt claimed by the Respondent over and above the sum already paid and counter claims against the Respondent a sum of USD 558,280.88. The Applicant paid a total sum of USD 1,103,869.00 for hire of the equipment. The deponent stated that the Applicant is willing and able to settle all debts rightfully due to the Respondent but there is no ascertained debt. The Applicant has continually engaged the Respondent for reconciliation of accounts but the Respondent hurriedly issued a statutory demand before conclusion of reconciliation. There has never been any agreement of USD 470,201.44 and the Respondent issued the statutory demand prematurely and in bad faith. The Applicant employs over 273 citizens of Uganda who will be unfairly prejudiced through loss of gainful employment and unless the statutory demand is set aside, the commencement of insolvency proceedings will unjustly affect the Applicant's business reputation and render it unsuitable for gainful contractual agreements.

[4] The Respondent opposed the application through an affidavit in reply deposed by **Ms. Esther Amuna**, the Finance Manager of the Respondent, who stated that the rental amounts were calculated and added to the contract and the Applicant agreed to the rates and the Respondent was not supposed to refund in case the Applicant had used fewer hours. The deponent stated that rain was not one of the elements envisaged in the contract and that the Applicant could have chosen other fuel providers at the time. She stated that the Respondent's invoices to the Applicant did not count the days the machines had broken down and the stand down days. The Applicant also did not pay for mobilization and demobilization for all the machinery. She further stated that in the several reconciliation meetings, the cost of break down was removed from all invoices by the Respondent. The parties have met several times and agreed on payments which were never honored by the Applicant. The contradicting figures were because the Respondent had charged the Applicant 2% for failure to abide by the proposed payment plan of 8th June 2022. The parties had had a reconciliation meeting and the Applicant had written proposing a payment plan which the Respondent did not find tenable and did not approve because of the Applicant's failure to honor previous payment plans. The Applicant had admitted part of the debt on 13th June 2023 and requested for a reconciliation meeting but there was no mention of any losses as claimed in the affidavit during the meeting and the same has never been communicated to the Respondent. The Respondent employs over 500 citizens of Uganda and the Applicant's failure to honor its obligations has jeopardized the Respondent's business.

#### **Representation and Hearing**

[5] At the hearing, the Applicant was represented by **Mr. Laston Gulume** and **Ms. Lucy Suky** of M/s ALP Advocates together with **Mr. Milton Ocen** of M/s Milton Advocates; while the Respondent was represented by **Mr. Mudali Ricky** of M/s Orima & Co. Advocates. It was agreed that the hearing proceeds by way of written submissions which were duly filed and have been taken into consideration in the determination of the matter before Court.

#### **Issues for Determination by the Court**

[6] Two issues are up for determination by the Court namely;

- a) Whether the statutory demand issued to the Applicant on 21st July 2023 should be set aside? - b) What remedies are available to the parties?

#### **Resolution of the Issues**

## **Issue 1: Whether the statutory demand issued to the Applicant on 21st July 2023 should be set aside?**

#### **Submissions by Counsel for the Applicant**

[7] Counsel cited the case of *Springs International Hotel Limited v Hotel Diplomate & Anor HCMC No. 42 of 2015* to the effect that the companies court is not, and should not be used as, a debt- collecting court. Counsel submitted that under section 5(4) (a), (c) and (d) of the Insolvency Act, the court can set aside a statutory demand when satisfied that there is a substantial dispute whether the debt is owing or due; the debtor appears to have a counter claim, set off or cross demand; or on any other ground the court deems fit. Counsel submitted that the statutory demand should be set aside on the grounds that the debt is substantially disputed, the Applicant has a counter claim and a cross demand of a higher amount, and that the statutory demand was issued in bad faith and with intent to bring improper pressure to the Applicant. Counsel submitted that the law under sections 3(1)(a), 4(2)(a)(ii) and 5(4) of the Insolvency Act requires a statutory demand as a precursor to insolvency proceedings to be reserved for instances where a company owes an ascertained and undisputed debt and should not be used as a high handed method of recovering unascertained debts.

[8] Counsel also submitted that the Respondent's claim of USD 470,201.44 that is disputed by the Applicant, represented by the Respondent as reconciled amounts are, in fact, unilateral computations, that keeps changing at each point without explanation. Counsel further stated that the stand downs halted work and caused the Applicant to suffer financial loss to a tune of USD 558,280 which sum exceeds the USD 470,201.44 claimed by the Respondent which can be offset from the sum owed. Counsel prayed that court finds that there are sufficient grounds to set aside the statutory demand.

#### **Submissions by Counsel for the Respondent**

[9] Counsel cited the case of *Sparkasse Bregenz Bank Ag v Associated Capital Corporation, Court of Appeal Civil Appeal No. 2 of 2002* to the effect that substantial (dispute) means having substance and not frivolous; that there must be so much doubt and question about the liability to pay the debt that the court sees that there is a real question to be decided. Counsel submitted that in *Regal Pharmaceuticals Ltd v Maria Assumpta Pharmaceutical Ltd Company Cause No. 20 of 2010* which relied on the Kenyan case of *Re Global Tours and Travels Ltd [2001] 1 EA 195 (CCK)*, the term "disputed on substantial grounds" was defined to mean that the debt is disputed on a ground which is a plausible defence in an action for the debt claimed. Counsel submitted that the instant application does not present a substantial dispute over the debt or a reasonable counter claim. Counsel submitted that for a debt to be ascertained, it need not be agreed to by both parties and a common position reached over the same. Counsel argued that the amount claimed by the Respondent is based on contract and can be determined and ascertained and a breakdown of the reconciled amount is to the tune of USD 470,201.44.

[10] Counsel further disputed the claims that the Applicant incurred a financial loss which could set off their claim. Counsel argued that the alleged financial loss was neither raised by the Applicant in the previous engagements

nor was any evidence attached to show its basis. Counsel concluded that the Applicant was simply using delaying tactics to avoid a debt owed to the Respondent. Counsel emphasized that at the time of issuance of the statutory demand, the amount due was USD 470,201.44 and the same was agreed on during the reconciliation meeting of 26th June 2023. Counsel prayed that the application be dismissed with costs or, in the alternative, orders for a court supervised reconciliation be issued and the debtor be ordered to pay the reconciled debt within a specific period.

#### **Determination by the Court**

[11] The position of the law is that the court may exercise discretion to grant an application to set aside a statutory demand where it is satisfied on any or several of the grounds set out under Section 5(4) of the Insolvency Act 2011. *Section 5(4) of the Insolvency Act 2011* provides as follows;

*"The Court may grant an application to set aside a statutory demand if it is satisfied that –*

- *a) there is a substantial dispute whether the debt is owing or due;* - *b) the debtor appears to have a counter claim, setoff or cross demand and the amount specified in the demand less the amount of the counter claim, set off or cross demand, is less than the prescribed amount;* - *c) the creditor holds some property in respect of the debt claimed by the debtor and that the value of the security is equivalent to or exceeds the full amount of the debt; or* - *d) the demand ought to be set aside on such grounds as it deems fit".*

[12] In this case, the Applicant seeks to move the Court to set aside the statutory demand on three grounds under paragraphs (a), (b) and (d) of the above cited provision. I will start with the question as to whether, in light of the application, there is a substantial dispute whether the debt is owing or due. I need to state that in a proceeding such as this, the role of the court is not to investigate as to which of the claims by either party is correct on the merits. Rather, its role is to determine whether a substantial dispute exists as to whether a debt is owing and is due. The law is that in determining whether a debt is disputed on substantial grounds or not, the debt must be ascertained and unequivocal. The test used is similar to the one courts use in determining applications for leave to appear and defend a summary suit. See: *Regal Pharmaceuticals Limited v Maria Assumpta Pharmaceuticals Limited, Company Cause No.20 of 2011*.

[13] Like in the case of an application for leave to appear and defend a summary suit, where an applicant establishes grounds of a plausible defence in the matter, the court shall grant leave to appear and defend the summary suit. Conversely, where the summary suit is properly brought for recovery of a liquidated claim, and the defendant/applicant fails to raise any bonafide triable issue of fact or law, the court shall proceed to enter judgment and decree upon the claim in the summary suit. Likewise, where by this application the applicant has established the kind of dispute that would entitle him to require the dispute to be tried, the statutory demand would be liable to be set aside. If, on the other hand, no such dispute has been established, despite the protestation by the applicant, the court would go ahead to grant the remedies provided for under Section 5(5) of the Insolvency Act.

7 [14] On the case before me, the evidence on record indicates that the parties have held several reconciliation meetings and have arrived at varying figures as representing the outstanding amount. The Respondent has zeroed on the sum of USD 470,201.44 as being the sum that was established by the final reconciliation. However, it is stated by the Applicant that the said computation was done by the Respondent unilaterally. Indeed, the documents (Annexures "I-2" and "J" to the affidavit in reply) that reflect the said computation have nothing on them to indicate that they were made with the participation of the Applicant. The dispute raised by the Applicant over the computation leading to the sum of USD 470,201.44 as the outstanding sum is, therefore, grounded and substantive. Such circumstances make the debt unascertained and thus substantially in dispute.

[15] Secondly, the Applicant has made a cross-demand and counter claim against the Respondent and has argued that the sum in the counter claim is capable of off-setting the Respondent's claim. This claim by the Applicant has to be verified and investigated before the Court can come to any conclusion on its merits. As such, it is not a question that can be determined at this stage and under such proceedings. Rather, it is one that will require investigation and determination by way of a civil suit.

[16] The Applicant has also invoked the discretion of the Court to look behind the propriety of the trigger of insolvency proceedings on the present facts and circumstances. It is claimed by the Applicant that the company is a going concern that is capable of meeting its obligations and the only reason the debt herein in issue was not paid was because of the existing dispute. The Applicant claims that the Respondent's issuance of the statutory demand was made prematurely, in bad faith and with an intention to bring pressure to bear upon the Applicant over a debt that would have been satisfied without needing to bring the company into liquidation. The Applicant therefore prays to court to set aside the statutory demand upon such ground as the court may deem fit. The Respondent denied the allegation of bad faith and the intention to exert unreasonable pressure upon the Applicant; and insisted that there is sufficient evidence to establish the inability of the Applicant to pay its debts.

[17] The long held view of the law is that insolvency proceedings are not intended as a means for a single creditor to enforce its debt but are instead a method of collective realization of the assets of the debtor in order to maximize recovery for the general body of creditors. It is trite law that a court is not, and should not be used as, a debt collecting court. See: *Chan Siew Lee Jannie v Australian and New Zealand Banking Group Ltd [2016] 3 SLR 239*; *Cambridge Gas Transportation Corp v Official Committee of Unsecured Creditors of Navigator Holdings Plc [2007] 1 AC 508* and *Re A company (No.001573 of 1993 [1983] B. L. C 492*.

[18] Put in a proper perspective, insolvency proceedings are principally not a means of debt recovery against debtors unwilling to pay their debts. Rather, the proceedings are meant for companies or such other debtors that are financially struggling, undergoing financial distress, clearly going down and thus unable to pay their debts. The proceedings are meant to preserve value of the company's assets either to save it from completely going down or if it has to go down, to maximize the possibility of recovery by the lining creditors. For a company that is clearly healthy and/or is a going concern to be subjected to insolvency proceedings, simply because it has disagreed with one of its creditors upon their claim, is a step that is clearly contrary to both the letter and the spirit of the law of insolvency.

[19] In the instant case, no evidence has been adduced showing that the Applicant company is undergoing financial distress. The only available evidence is that it owes some (yet to be ascertained sum of) money to the Respondent and has refused, failed or neglected to pay. There is no proof that the no-payment has anything to do with the company's inability to pay its debts. Such evidence is not, in the least, sufficient to occasion a trigger of insolvency proceedings. For this reason, I would still set aside the statutory demand on ground that I am satisfied that the demand ought to be set aside on such other ground as the court deems fit, in line with Section 5(4)(d) of the Insolvency Act 2011.

[20] In the premises, the Applicant has satisfied the Court on a balance of probabilities that the impugned statutory demand ought to be set aside on the grounds set out herein above. This application is accordingly allowed with orders that;

- a) The statutory demand issued to the Applicant on 21st July 2023 is set aside. - b) The costs of the application shall be borne by the Respondent.

It is so ordered.

*Dated, signed and delivered by email this 3rd day of May, 2024.*

**Boniface Wamala JUDGE**