Background and Introduction
1. This ruling pertains to two matters before the court; an application dated 28th February 2024 (hereinafter the application) and a Preliminary Objection dated 17th July 2024 (hereinafter the PO). The application is filed by the plaintiff (hereinafter the Bank), a creditor of the respondent company (hereinafter the Company).
2. The Bank is seeking leave of this Court to institute and/or continue legal proceedings against the Company, which is currently under administration and the administrator, P.V.R. Rao, to be enjoined as an interested party in the suit. It has invoked the provisions of Article 50 of the Constitution and Sections 1A, 1B, 3A and 63(e) of the Civil Procedure Act to urge that it be granted leave to sue the Company notwithstanding the ongoing administration.
3. The Bank contends that denying it an opportunity to pursue its claim would unjustly impede its right to have the dispute resolved on merits in a timely manner, contrary to Article 50(1) of the Constitution.
4. The Company and the Administrator have both opposed the application and raised a PO premised on lack of jurisdiction. In summary, they argue that by virtue of the Company being under administration, this Court, sitting in these proceedings, lacks jurisdiction to grant leave to sue the Company. They rely on Section 560(1)(d) of the Insolvency Act, which imposes a moratorium on commencing or continuing any legal proceedings against a company in administration without the consent of the administrator or approval of the court.
5. They contend that only the court handling the administration matter specifically in Insolvency Cause No. E003 of 2021 can grant such leave. It is their position that until such leave is obtained in the insolvency cause, any proceedings against the Company remain stayed. Accordingly, they argue that this Court lacks jurisdiction to entertain the application and pray that the application be struck out in limine for want of jurisdiction.
6. The Bank filed grounds of opposition to the PO, asserting that it does not meet the required threshold. It urges the Court to invoke the overriding objective under Sections 1A, 1B and 3A of the Civil Procedure Act to do substantive justice rather than terminate the matter on a technicality which would unduly prejudice it. The Bank further emphasizes that Article 159(2)(b) of the Constitution requires that justice shall not be delayed.
Analysis and Determination
7. The PO and the application were canvassed together by way of written submissions which I have carefully considered alongside all the other filings by the parties. I shall address the PO in priority recognizing that the question of jurisdiction is central and may be dispositive of the entire matter.
8. The Bank has raised the point that the PO does not meet the required threshold of such an objection. As defined in the classic case of Mukisa Biscuit Manufacturing Co. Ltd v West End Distributors Ltd [1969] EA 696, a preliminary objection is one that raises a pure point of law, is argued on the basis that no facts are in dispute, and which, if upheld, is capable of disposing of the suit.
9. There is no doubt that the Company’s PO squarely raises a point of law, on the jurisdiction of this Court to entertain the application in view of the Insolvency Act. Jurisdiction is a point of law of paramount importance. Indeed, it is trite (as pronounced in Owners of the Motor Vessel “Lillian S” v Caltex Oil (Kenya) Ltd [1989] KLR 1) that jurisdiction is everything: if a court finds it has no jurisdiction, it must immediately down its tools and take no further step.
10. The issue of jurisdiction does not involve contestable facts here; it is common ground that the Company is under administration, which fact is evidenced by the administrator’s appointment. It is a factual point that the Bank has not obtained leave from any insolvency court or the administrator prior to filing this application. The PO therefore proceeds on the uncontested factual premise that the Company is in administration, and poses a legal question as to whether this Court can lawfully grant leave as required under Section 560 of the Insolvency Act.
11. No further evidence needs to be ascertained to determine that legal question, and the Court is not being called upon to exercise any discretion on facts. It is simply asked to determine the legal competency of the application. Accordingly, I am satisfied that the PO as framed is a proper one under the Mukisa Biscuit principles.
12. The crux of the dispute is whether this Court (as differently constituted from the insolvency court handling the Company’s administration) has jurisdiction to grant the leave sought by the applicant. Section 560 of the Insolvency Act provides for a statutory moratorium once a company enters administration. In particular, Section 560(1)(d) stipulates that
“While a company is under administration… 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 moratorium is automatic by operation of law upon administration and is aimed at protecting the company from a multiplicity of claims during the rescue or restructuring period. Section 2 of the Insolvency Act defines “Court” as “…the High Court, and if there is an insolvency division of that Court, means that division.”
14. This definition is critical. It indicates that for insolvency matters, if a specific division of the High Court is designated to handle insolvency (as is the case in the Commercial & Tax Division), then “the Court” for purposes of granting leave under Section 560 is the Commercial Division of the High Court. The clear legislative intent of Section 560 is to centralize decisions affecting an insolvency in the hands of the court seized of the insolvency proceedings, rather than potentially disparate courts or divisions.
15. Section 560A(1) stipulates that
“When considering whether to grant approval under section 560, the court may in particular take into consideration–
(a) the statutory purpose of the administration;
(b) the impact of the approval on the applicant, particularly whether the applicant is likely to suffer significant loss;
(c) the legitimate interests of the applicant and the legitimate interests of the other creditors of the company, giving priority to the proprietary interests of the applicant; and
(d) the conduct of the parties.”
16. There is judicial consensus that the only way that the above inquiry can be effectively conducted, for purposes of granting such leave, is by the court seized of the insolvency proceedings, and not by a different court even in the Commercial and Tax Division.
17. In Lambart Lwanga Ogochi & 4 Others v Ponginangipalli V. Rao (2022) eKLR, the court concluded that “the Court that is referred to in section 560 of the Act is the Insolvency Court, that is, the court that is exercising insolvency jurisdiction.” (emphasis mine).
18. Importantly, the court held that leave should be sought within the insolvency proceedings themselves, and if any proceedings are instituted in any other court without such leave, that other court would be acting on minimal information and potentially defeating the legislative intent of the Insolvency Act.
19. The point was also brought home in Jane Gathoni Ng’ang’a v Cytonn High Yield Solutions LLP (In Administration), High Court Misc. Application E616 of 2021 (A. Mabeya, J). In that case, the applicant sought leave (by way of a Miscellaneous Application) to continue arbitral proceedings against the Company in administration. The respondent’s administrator raised a preliminary objection identical to the one herein, asserting that leave could only be granted in the insolvency cause.
20. The High Court upheld the objection, explicitly finding that it lacked jurisdiction to entertain the application for leave since such application ought to have been made in the insolvency proceedings (Commercial Insolvency Cause No. E063 of 2021).
21. From these decisions, I agree that the term “approval of the Court” in Section 560(1)(d) must be read in context to mean approval of the insolvency court seized of the matter (in this case, Insolvency Cause No. E003 of 2021). It would otherwise be contrary to the Insolvency Act’s scheme, and could lead to conflicting decisions, if a parallel court were to purport to grant leave in isolation from the insolvency proceedings.
22. The insolvency judge, being appraised of the Company’s financial position and the administrator’s progress, is best placed to decide whether a proposed lawsuit will impede or assist the achievement of the administration’s objectives.
23. Not even the applicant’s invocation of this Court’s inherent powers and the overriding objective can confer jurisdiction where none exists. Sections 1A, 1B and 3A of the Civil Procedure Act cannot be used to extend the court’s jurisdiction beyond statutory limits. While the court is mindful of the need to do justice and not unduly delay proceedings, it must do so within the confines of the law. It would not be a proper use of inherent power or the overriding objective to ignore the clear jurisdictional directives of the Insolvency Act.
Disposition
24. Accordingly, the Preliminary Objection dated 17th July 2024 is hereby upheld. The Notice of Motion application dated 28th February 2024 is struck out in its entirety for want of jurisdiction, with costs.
DATED, SIGNED AND DELIVERED IN MOMBASA
THIS 17TH DAY OF APRIL 2025
F. MUGAMBI
JUDGE