Introduction and Background
1. By an application dated 13th February 2025, the 3rd Defendant, herein the Applicant, seeks dismissal of the present suit on account of liquidation orders issued against the 1st and 2nd Defendants. The Applicant contends that nearly two years have elapsed since the liquidation order was made, yet the Plaintiffs, despite being fully aware of the administration and subsequent liquidation of the 1st and 2nd Defendants, have failed to obtain the requisite leave of the Insolvency Court to proceed with this suit. It is the Applicant’s position that, absent such leave, the Plaintiffs cannot lawfully maintain the present proceedings. The Applicant relies on the determination in Insolvency Petition No. E063 of 2021 Cytonn High Yields Solutions LLP (In Liquidation), wherein this Court directed creditors to file proofs of debt with the liquidator.
2. In opposition to the application, the Respondents filed a Replying Affidavit sworn by Regina June Ngina Mwanzi. They confirm that the present proceedings were stayed and parties referred to arbitration pursuant to a Ruling delivered on 22nd July 2023. They aver that the arbitration process was frustrated and did not commence. The Respondents further acknowledge the administration and liquidation orders against the 1st and 2nd Defendants, and state that they duly filed their proof of debt with the Official Receiver on 22nd February 2023 for the sum of Kshs. 52,020,120/=.
3. They argue that they could not seek leave of Court to proceed with the suit owing to the stay of proceedings imposed by this Court (Mabeya J) in Cytonn High Yields Solutions LLP (In Administration) v Official Receiver [2023] KESC 16 (KLR). The Respondents contend that the Applicant has not demonstrated any prejudice suffered, that no statutory timeline exists for seeking leave, and that there has been no undue delay on their part.
4. I have considered the pleadings and the submissions on record. While the Respondents filed a Replying Affidavit to the application, no submissions were filed at the time of writing this Ruling.
Analysis and Determination
5. Section 432(2) of the Insolvency Act provides in mandatory terms that:
“When a liquidation order has been made or a provisional liquidator has been appointed, legal proceedings against the company may be begun or continued only with the approval of the Court and subject to such conditions as the Court considers appropriate.”
6. This requirement is deliberate. Read together with the Schedule to the Insolvency Act and Form No. 5 of the Insolvency Regulations, it is evident that upon the making of a liquidation order, creditors are required to file proofs of debt before the liquidator. The leave of Court serves, inter alia, to prevent multiplicity of claims between the Courts and the liquidator, and to ensure that only disputes relating to claims not admitted by the liquidator are ventilated before the Court. While the Respondents contend that they have filed their proof of debt before the liquidator, this has not been proved. But if that be the case, that is all the more reason that this Court would not be inclined to allow the litigation herein to proceed.
7. Section 432(3) of the Insolvency Act underscores the collective nature of liquidation proceedings. It provides that:
“An order for liquidating a company operates in favour of all the creditors and of all contributories of the company as if made on the joint application of all of them.”
8. This provision emphasizes the collective nature of liquidation proceedings. The law treats liquidation as a class action, designed to protect the interests of all creditors equally and to ensure that the company’s estate is preserved for fair distribution. It follows that any litigation pursued outside the liquidation framework, without leave of Court, is not merely a procedural irregularity but a substantive prejudice to the collective body of creditors.
9. The Respondents argue that no prejudice has been suffered by the Applicant. However, this contention overlooks the broader prejudice inherent in parallel proceedings. Every suit that the liquidator is compelled to defend imposes costs upon the insolvent estate. These costs are borne not by the individual litigant but by the estate as a whole, thereby diminishing the pool of assets available for distribution to all creditors. In effect, the pursuit of proceedings without leave undermines the statutory scheme of collective action and erodes the principle of equality among creditors.
10. Moreover, the requirement for leave serves as a safeguard against multiplicity of claims. It ensures that disputes are streamlined and that the liquidator is not burdened with defending piecemeal litigation in different forums and also that disputes that can be resolved within the framework of proof of debts do not have to find their way in Court. To permit proceedings without leave would expose the estate to fragmented litigation, unnecessary expense, and the risk of inconsistent outcomes, all of which prejudice the larger body of creditors.
11. Thus, while the Respondents may assert that the Applicant has not demonstrated specific prejudice, the prejudice is systemic and inherent in the very nature of liquidation. The law presumes prejudice because any depletion of the estate through litigation costs reduces the eventual dividend payable to creditors. Section 432(3) therefore ties directly to the Applicant’s argument that liquidation is a collective process, and any unauthorized proceedings compromise that collective interest.
12. In the present case, the Respondents appear to be pursuing parallel proceedings under the Arbitration Act and before this Court, without first obtaining the leave mandated by statute. This is impermissible.
Disposition
13. In light of the foregoing, the application dated 13th February 2025 succeeds. The suit is hereby struck out. I make no orders as to costs.
1. By an application dated 13th February 2025, the 3rd Defendant, herein the Applicant, seeks dismissal of the present suit on account of liquidation orders issued against the 1st and 2nd Defendants. The Applicant contends that nearly two years have elapsed since the liquidation order was made, yet the Plaintiffs, despite being fully aware of the administration and subsequent liquidation of the 1st and 2nd Defendants, have failed to obtain the requisite leave of the Insolvency Court to proceed with this suit. It is the Applicant’s position that, absent such leave, the Plaintiffs cannot lawfully maintain the present proceedings. The Applicant relies on the determination in Insolvency Petition No. E063 of 2021 Cytonn High Yields Solutions LLP (In Liquidation), wherein this Court directed creditors to file proofs of debt with the liquidator.
2. In opposition to the application, the Respondents filed a Replying Affidavit sworn by Regina June Ngina Mwanzi. They confirm that the present proceedings were stayed and parties referred to arbitration pursuant to a Ruling delivered on 22nd July 2023. They aver that the arbitration process was frustrated and did not commence. The Respondents further acknowledge the administration and liquidation orders against the 1st and 2nd Defendants, and state that they duly filed their proof of debt with the Official Receiver on 22nd February 2023 for the sum of Kshs. 52,020,120/=.
3. They argue that they could not seek leave of Court to proceed with the suit owing to the stay of proceedings imposed by this Court (Mabeya J) in Cytonn High Yields Solutions LLP (In Administration) v Official Receiver [2023] KESC 16 (KLR). The Respondents contend that the Applicant has not demonstrated any prejudice suffered, that no statutory timeline exists for seeking leave, and that there has been no undue delay on their part.
4. I have considered the pleadings and the submissions on record. While the Respondents filed a Replying Affidavit to the application, no submissions were filed at the time of writing this Ruling.
Analysis and Determination
5. Section 432(2) of the Insolvency Act provides in mandatory terms that:
“When a liquidation order has been made or a provisional liquidator has been appointed, legal proceedings against the company may be begun or continued only with the approval of the Court and subject to such conditions as the Court considers appropriate.”
6. This requirement is deliberate. Read together with the Schedule to the Insolvency Act and Form No. 5 of the Insolvency Regulations, it is evident that upon the making of a liquidation order, creditors are required to file proofs of debt before the liquidator. The leave of Court serves, inter alia, to prevent multiplicity of claims between the Courts and the liquidator, and to ensure that only disputes relating to claims not admitted by the liquidator are ventilated before the Court. While the Respondents contend that they have filed their proof of debt before the liquidator, this has not been proved. But if that be the case, that is all the more reason that this Court would not be inclined to allow the litigation herein to proceed.
7. Section 432(3) of the Insolvency Act underscores the collective nature of liquidation proceedings. It provides that:
“An order for liquidating a company operates in favour of all the creditors and of all contributories of the company as if made on the joint application of all of them.”
8. This provision emphasizes the collective nature of liquidation proceedings. The law treats liquidation as a class action, designed to protect the interests of all creditors equally and to ensure that the company’s estate is preserved for fair distribution. It follows that any litigation pursued outside the liquidation framework, without leave of Court, is not merely a procedural irregularity but a substantive prejudice to the collective body of creditors.
9. The Respondents argue that no prejudice has been suffered by the Applicant. However, this contention overlooks the broader prejudice inherent in parallel proceedings. Every suit that the liquidator is compelled to defend imposes costs upon the insolvent estate. These costs are borne not by the individual litigant but by the estate as a whole, thereby diminishing the pool of assets available for distribution to all creditors. In effect, the pursuit of proceedings without leave undermines the statutory scheme of collective action and erodes the principle of equality among creditors.
10. Moreover, the requirement for leave serves as a safeguard against multiplicity of claims. It ensures that disputes are streamlined and that the liquidator is not burdened with defending piecemeal litigation in different forums and also that disputes that can be resolved within the framework of proof of debts do not have to find their way in Court. To permit proceedings without leave would expose the estate to fragmented litigation, unnecessary expense, and the risk of inconsistent outcomes, all of which prejudice the larger body of creditors.
11. Thus, while the Respondents may assert that the Applicant has not demonstrated specific prejudice, the prejudice is systemic and inherent in the very nature of liquidation. The law presumes prejudice because any depletion of the estate through litigation costs reduces the eventual dividend payable to creditors. Section 432(3) therefore ties directly to the Applicant’s argument that liquidation is a collective process, and any unauthorized proceedings compromise that collective interest.
12. In the present case, the Respondents appear to be pursuing parallel proceedings under the Arbitration Act and before this Court, without first obtaining the leave mandated by statute. This is impermissible.
Disposition
13. In light of the foregoing, the application dated 13th February 2025 succeeds. The suit is hereby struck out. I make no orders as to costs.