Background and introduction
1. This Ruling determines the application dated 5th November 2024, brought under Order 2 Rule 15, Order 51 Rule 1 of the Civil Procedure Rules, Sections 1A, 1B, 3 and 3A of the Civil Procedure Act and Article 159 of the Constitution of Kenya. It is supported by the affidavits of Miriam Waruinu Kariuki.
2. The applicant seeks to arrest a Ruling scheduled for 8th November 2024 in respect of the application dated 29th July 2024 and to have the respondent’s petition herein struck out. The applicant contends that a consent judgment in Naivasha HCCC E009 of 2021 along with the statutory demand notice upon which the petition is premised, have since been set aside. On that basis, the applicant argues that the respondent’s petition is without foundation and ought to be struck out.
3. The application is opposed through a replying affidavit sworn by Benjamin Wainaina on 11th November 2024. While the respondent does not dispute that the consent judgment and the statutory demand notice were set aside, it is contended that the liquidation petition is premised on grounds independent of the statutory demand and therefore remains valid. The respondent asserts that a petition filed under Section 384(1)(c) of the Insolvency Act does not rely solely on the existence of a judgment or statutory demand.
Analysis and Determination
4. I have carefully considered the application, response, submissions and evidence produced by the parties. To begin with, prayer 1 of the application is moot, given that the Ruling dated 26th July 2024 has already been delivered.
5. The respondent challenges the application on the basis of Order 2 Rule 15(1)(a) of the Civil Procedure Rules, arguing that evidence has been improperly filed by the applicant, contrary to the requirements under the Rules. Order 2 Rule 15(1)(a) allows for the striking out of a pleading on the ground that it discloses no reasonable cause of action or defence. Order 2 Rule 15(2) further provides that “no evidence shall be admissible on an application under subrule (1)(a), but the application shall state concisely the grounds on which it is made.”
6. This means that if an application is solely brought under Rule 15(1)(a), no affidavit or other evidence is admissible and the application must rely entirely on the pleadings. However, in this case, the applicant’s application is not solely grounded on Rule 15(1)(a); it is also brought under other provisions, including Sections 1A, 1B, 3, and 3A of the Civil Procedure Act and Article 159 of the Constitution, which emphasize the just, expeditious, proportionate, and affordable resolution of disputes.
7. Moreover, even within the framework of Order 2 Rule 15, the applicant invokes multiple grounds beyond sub rule (1)(a), including allegations that the petition is otherwise an abuse of the process of the court, a ground under sub rule (1)(d) for which evidence is admissible. In these circumstances, the filing of evidence does not render the application fatally defective. At most, the court may disregard any inadmissible material but proceed to determine the application on its merits based on the properly pleaded and supported grounds.
8. To hold otherwise in my view would elevate form over substance, contrary to the spirit of Article 159(2)(d) of the Constitution. Accordingly, I find that the respondent’s objection is without merit and does not provide a basis for striking out the application which I now proceed to determine.
9. Section 384(1)(c) of the Insolvency Act provides as follows;
“For the purposes of this Part, a company is unable to pay its debts—
(a)…
(b)…
(c).if it is proved to the satisfaction of the Court that the company is unable to pay its debts as they fall due”.
10. The central issue for determination is whether proof of debt under this provision requires the existence of a judgment or decree. The respondent’s petition dated 20th June 2023 is premised on an alleged debt of Kshs. 104,491,386/=. The respondent contends that the debt was confirmed by a ruling of the court in HCCC E009 of 2021. However, the applicant has brought to the court’s attention a ruling delivered in which the consent judgment in HCCC E009 of 2021 was set aside. At paragraph 87 of that ruling, the court held:
“The consent judgment as relates to the applicant is set aside … the suit will then be set down for hearing as it relates to the applicant per se.”
11. Further, on 5th November 2024, this court set aside the statutory demand which formed the basis of the present petition, expressly noting that the underlying consent judgment had been set aside. In that ruling, the court found that the alleged debt is disputed on substantial grounds.
12. It bears emphasizing however, that under Section 384(1)(b) of the Insolvency Act, a statutory demand is not the sole basis for proving indebtedness. It is my view that the consequence of failing to meet a statutory demand is that it constitutes prima facie evidence of the company’s inability to pay its debts. In other words, the law raises a presumption of insolvency once the 21-day period lapses without payment or satisfactory arrangement. However, my reading of the Insolvency Act is that the presumption is rebuttable.
13. I say so recognizing that Section 384(1)(c) provides that a company may also be deemed unable to pay its debts if it is proved to the court’s satisfaction that the company is unable to pay its debts as they fall due. The court therefore must inquire whether, in substance, the Company is truly insolvent or if the non-payment is due to other reasons. Even in being able to make such an enquiry, the starting point would still be, whether there is a debt.
14. Focus on the debt as a legitimate debt would be a crucial determinant under the provision, as reaffirmed in Universal Hardware Limited v. African Safari Club Limited [2013] eKLR. This court held that; “A disputed debt on substantial and bona fide grounds cannot form the basis for a winding up proceeding. Such proceedings would amount to an abuse of process.”
15. This means that it would be pointless to proceed with a petition under Section 384(1)(c) if the debt is substantially disputed, as is the case here. The existence and amount of the debt remain unsettled and must first be established in a different forum. This court has already pronounced itself that it is appropriate for the dispute to proceed in a civil court so as to resolve the contested issues surrounding the debt. This court, sitting as an insolvency court, does not have jurisdiction to evaluate the veracity of the debt or to adjudicate upon disputed facts with the same latitude as a civil court. Thereafter, the respondent would still be at liberty to pursue a fresh liquidation petition.
Disposition
16. Accordingly, the application dated 5th November 2024 is allowed. The respondent’s petition is hereby struck out. The applicant shall have the costs of this application.
DATED, SIGNED AND DELIVERED IN MOMBASA
THIS 16TH DAY OF APRIL 2025.
F. MUGAMBI
JUDGE
1. This Ruling determines the application dated 5th November 2024, brought under Order 2 Rule 15, Order 51 Rule 1 of the Civil Procedure Rules, Sections 1A, 1B, 3 and 3A of the Civil Procedure Act and Article 159 of the Constitution of Kenya. It is supported by the affidavits of Miriam Waruinu Kariuki.
2. The applicant seeks to arrest a Ruling scheduled for 8th November 2024 in respect of the application dated 29th July 2024 and to have the respondent’s petition herein struck out. The applicant contends that a consent judgment in Naivasha HCCC E009 of 2021 along with the statutory demand notice upon which the petition is premised, have since been set aside. On that basis, the applicant argues that the respondent’s petition is without foundation and ought to be struck out.
3. The application is opposed through a replying affidavit sworn by Benjamin Wainaina on 11th November 2024. While the respondent does not dispute that the consent judgment and the statutory demand notice were set aside, it is contended that the liquidation petition is premised on grounds independent of the statutory demand and therefore remains valid. The respondent asserts that a petition filed under Section 384(1)(c) of the Insolvency Act does not rely solely on the existence of a judgment or statutory demand.
Analysis and Determination
4. I have carefully considered the application, response, submissions and evidence produced by the parties. To begin with, prayer 1 of the application is moot, given that the Ruling dated 26th July 2024 has already been delivered.
5. The respondent challenges the application on the basis of Order 2 Rule 15(1)(a) of the Civil Procedure Rules, arguing that evidence has been improperly filed by the applicant, contrary to the requirements under the Rules. Order 2 Rule 15(1)(a) allows for the striking out of a pleading on the ground that it discloses no reasonable cause of action or defence. Order 2 Rule 15(2) further provides that “no evidence shall be admissible on an application under subrule (1)(a), but the application shall state concisely the grounds on which it is made.”
6. This means that if an application is solely brought under Rule 15(1)(a), no affidavit or other evidence is admissible and the application must rely entirely on the pleadings. However, in this case, the applicant’s application is not solely grounded on Rule 15(1)(a); it is also brought under other provisions, including Sections 1A, 1B, 3, and 3A of the Civil Procedure Act and Article 159 of the Constitution, which emphasize the just, expeditious, proportionate, and affordable resolution of disputes.
7. Moreover, even within the framework of Order 2 Rule 15, the applicant invokes multiple grounds beyond sub rule (1)(a), including allegations that the petition is otherwise an abuse of the process of the court, a ground under sub rule (1)(d) for which evidence is admissible. In these circumstances, the filing of evidence does not render the application fatally defective. At most, the court may disregard any inadmissible material but proceed to determine the application on its merits based on the properly pleaded and supported grounds.
8. To hold otherwise in my view would elevate form over substance, contrary to the spirit of Article 159(2)(d) of the Constitution. Accordingly, I find that the respondent’s objection is without merit and does not provide a basis for striking out the application which I now proceed to determine.
9. Section 384(1)(c) of the Insolvency Act provides as follows;
“For the purposes of this Part, a company is unable to pay its debts—
(a)…
(b)…
(c).if it is proved to the satisfaction of the Court that the company is unable to pay its debts as they fall due”.
10. The central issue for determination is whether proof of debt under this provision requires the existence of a judgment or decree. The respondent’s petition dated 20th June 2023 is premised on an alleged debt of Kshs. 104,491,386/=. The respondent contends that the debt was confirmed by a ruling of the court in HCCC E009 of 2021. However, the applicant has brought to the court’s attention a ruling delivered in which the consent judgment in HCCC E009 of 2021 was set aside. At paragraph 87 of that ruling, the court held:
“The consent judgment as relates to the applicant is set aside … the suit will then be set down for hearing as it relates to the applicant per se.”
11. Further, on 5th November 2024, this court set aside the statutory demand which formed the basis of the present petition, expressly noting that the underlying consent judgment had been set aside. In that ruling, the court found that the alleged debt is disputed on substantial grounds.
12. It bears emphasizing however, that under Section 384(1)(b) of the Insolvency Act, a statutory demand is not the sole basis for proving indebtedness. It is my view that the consequence of failing to meet a statutory demand is that it constitutes prima facie evidence of the company’s inability to pay its debts. In other words, the law raises a presumption of insolvency once the 21-day period lapses without payment or satisfactory arrangement. However, my reading of the Insolvency Act is that the presumption is rebuttable.
13. I say so recognizing that Section 384(1)(c) provides that a company may also be deemed unable to pay its debts if it is proved to the court’s satisfaction that the company is unable to pay its debts as they fall due. The court therefore must inquire whether, in substance, the Company is truly insolvent or if the non-payment is due to other reasons. Even in being able to make such an enquiry, the starting point would still be, whether there is a debt.
14. Focus on the debt as a legitimate debt would be a crucial determinant under the provision, as reaffirmed in Universal Hardware Limited v. African Safari Club Limited [2013] eKLR. This court held that; “A disputed debt on substantial and bona fide grounds cannot form the basis for a winding up proceeding. Such proceedings would amount to an abuse of process.”
15. This means that it would be pointless to proceed with a petition under Section 384(1)(c) if the debt is substantially disputed, as is the case here. The existence and amount of the debt remain unsettled and must first be established in a different forum. This court has already pronounced itself that it is appropriate for the dispute to proceed in a civil court so as to resolve the contested issues surrounding the debt. This court, sitting as an insolvency court, does not have jurisdiction to evaluate the veracity of the debt or to adjudicate upon disputed facts with the same latitude as a civil court. Thereafter, the respondent would still be at liberty to pursue a fresh liquidation petition.
Disposition
16. Accordingly, the application dated 5th November 2024 is allowed. The respondent’s petition is hereby struck out. The applicant shall have the costs of this application.
DATED, SIGNED AND DELIVERED IN MOMBASA
THIS 16TH DAY OF APRIL 2025.
F. MUGAMBI
JUDGE