Background
1. This ruling relates to the application dated 5th April 2023 which seeks to strike out the petition filed herein. In response to the application the petitioner raised a Notice of Preliminary Objection dated 30th June 2023. The same is premised on the fact that the application is contra statute and breaches Rule 16 of the Insolvency Rules, 2016.
2. The said Rule 16 sets out the procedure for setting aside of statutory demands in the following terms:
“(1) The debtor may, apply to the Court for an order to set aside the statutory demand—
(a) within twenty-one days from the date of the service on the debtor of the statutory demand; or
(b) if the demand has been advertised in a newspaper, from the date of the advertisement's appearance or its first appearance, whichever is the earlier.
(2) Subject to any order of the Court under regulation 17 (7), time limited for compliance with the statutory demand shall cease to run from the date on which the application is lodged with the Court.
(3) The debtor's application shall be in Form 7 set out in the First Schedule and shall be supported by an affidavit, which shall be in Form 8 set out in the First Schedule.
(4) The affidavit referred to under paragraph (3) shall—
(a) specify the date on which the statutory demand came into the debtor's possession;
(b) state the grounds on which the debtor claims that it should be set aside; and
(c) annex a copy of the statutory demand.”
Analysis and determination
3. I shall begin by determining the preliminary objection. The same is premised on procedure upon the issuance of a statutory demand.
4. It is important to note that a statutory demand is a precursor to insolvency proceedings by which a creditor sets out to prove the debtor’s inability to settle their debt. The statutory demand therefore forms the basis for commencement of insolvency proceedings by way of a petition.
5. To buttress this point, Regulation 15(3) is also very clear that a petition shall be preceded by a statutory demand. Upon service of the demand the debtor is required to apply to Court to set aside the statutory demand where he has any objection to the same. Such an objection may be on the ground that the debt is genuinely disputed on substantial grounds or that the debtor has a counterclaim, set-off, or cross-demand equal to or greater than the amount of the debt or that the creditor holds some security for the debt, and the value of that security is more than the amount claimed.
6. The law requires that such an application must be filed within 21 days of the date of service or date of publication of the statutory demand whichever is earlier, by dint of Regulation 16. It is only upon the hearing and determination of this application that proceedings under the insolvency petition can proceed.
7. It therefore follows that an application for setting aside the statutory demand should be made under the insolvency notice proceedings, not under the insolvency petition. The reason for this is that the application to set aside the statutory demand would be premised on whether the statutory demand is valid or enforceable, rather than whether the debtor should be subjected to insolvency proceedings.
8. Filing an application for setting aside the statutory demand under the insolvency petition proceedings is therefore premature and fatally defective because it addresses the wrong procedural stage.
9. The specific grounds and circumstances surrounding the validity of the demand must be considered before any insolvency proceedings are initiated. I align myself with the submissions presented by the petitioner that the application is incurably defective.
Disposition
10. The petitioner’s preliminary objection is successful. The application dated 5th April 2023 is struck out for want of procedure with costs to the petitioner.
DATED, SIGNED AND DELIVERED IN NAIROBI
THIS 5TH DAY OF JULY 2024.
F. MUGAMBI
JUDGE