Introduction and Background
1. For determination is a creditor’s petition dated 28th January 2023. It seeks to have the respondent, ISHA LABEL CONVERTERS LIMITED (the Company) declared insolvent and liquidated under the provisions of the Insolvency Act No. 18 of 2015 and also for the Official Receiver to be appointed as its liquidator.
2. The petitioner contends that the respondent procured various goods on credit to the tune of GBP £94,010. The petitioner served a statutory demand upon the respondent on 27th July 2022 but the respondent is yet to pay the debt or comply with the statutory demand. The petitioner notes that there is no application to set aside the statutory demand pending before this or any other court.
3. The Company opposes the petition. In its replying affidavit and submissions, it contends that the alleged debt arises from machinery sold on credit by the petitioner to the Company. It asserts that the debt is disputed in good faith. It further asserts that the machinery supplied by the petitioner was defective, forcing the Company to incur approximately £48,000 in repair costs to make the machinery fully operational. The Company thus disputes the full sum claimed, maintaining that any obligation it has to the petitioner must be offset by the losses and expenses caused by the defective equipment.
4. The Company argues that because there exists a bona fide dispute as to the quality of goods and the true amount owed, an insolvency process is not the proper avenue for resolving this claim. It emphasizes that the Insolvency Act should not be used as a debt collection tool for a contested claim, and that the appropriate forum would be negotiation or ordinary civil proceedings to determine liability.
5. The Company further confirms that it had filed an application to strike out or stay the winding-up petition on grounds that the debt is disputed and the petition is an abuse of the court’s process. However, that application was struck out on technicalities for being procedurally defective before the merits could be heard.
6. Despite that setback, the Company maintains its substantive opposition to the petition. It has also produced audited financial statements which, it submits, demonstrate that it is solvent and able to pay its debts apart from the genuinely disputed sum. In the Company’s view, this is evidence that its refusal to pay the petitioner is not due to inability to pay, but due to a legitimate dispute over the debt.
Analysis and Determination
7. I have carefully considered the petition, response and the submissions from both parties. The main issue for determination is whether the petitioning creditor is entitled to a liquidation order against the Company.
8. Section 384(1)(a) of the Insolvency Act provides that a company is deemed unable to pay its debts if a creditor to whom the company owes Kshs. 100,000/= or more has served on the company, at its registered office, a written demand requiring payment, and the company has failed to pay or to satisfy the debt within 21 days after such service.
9. In this case, it is not in dispute that the petitioner served a statutory demand on 27th July 2022 for a sum far exceeding the statutory threshold. It is also undisputed that the Company did not pay any portion of the demanded sum within 21 days, nor did it apply to court to set aside the statutory demand within that period. On the face of it, therefore, the statutory precondition for a winding-up petition, which is non-compliance with a 21-day demand for a qualifying debt, was met.
10. 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. The Company is entitled to demonstrate that, despite non-payment, it is not insolvent or that there is a valid reason the demand was not honored, such as a dispute or set-off.
11. I say so noting that Section 384(1)(c) further provides that a company may 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.
12. There is no doubt that the Insolvency Act and the accompanying Insolvency Regulations recognize that a genuinely disputed debt should not be the basis for a winding-up. Regulation 17(6) of the Insolvency Regulations 2016 provides that the court shall set aside a statutory demand if, inter alia, “the debt is disputed on grounds which appear to the court to be substantial,” or the debtor has a counterclaim, set-off or cross-demand equal to or exceeding the amount of the debt.
13. Although in the present case the Company did not formally apply to set aside the demand within time, these principles still guide the court’s approach when a dispute is raised at the petition stage. The court will not ignore a substantial dispute just because the formal step of setting aside the demand was not taken; rather, it will consider all the evidence to determine if the debt is incontrovertible or not.
14. Even where the statutory threshold is met, the court retains a discretion whether to grant a liquidation order or not. Section 427 of the Insolvency Act implies that the court “may” make such order if the company is unable to pay its debts, meaning that it is not automatic. The court may still decline to make a winding-up order if it finds the petition to be an abuse of process, or if there are other remedies available, or if the debt is genuinely disputed.
15. Numerous judicial decisions have established that the winding-up jurisdiction is a drastic measure, akin to a “commercial death sentence” for a company, and should not be lightly invoked especially where liability for the debt is contested. (See for instance Synergy Industrial Credit Limited V Multiple Hauliers (EA) Limited, [2020] KEHC 3103 (KLR) and Matic General Contractors Limited V Kenya Power and Lighting Company Limited, [2000] eKLR). The court must be satisfied that insolvency proceedings are a proportionate and appropriate response in the circumstances of the case.
16. In summary, the statutory framework requires the petitioner to prove a due and unpaid debt above the statutory minimum, and allows the respondent to show, in rebuttal, that the debt is disputed on substantial grounds or is offset by a counterclaim, or that the Company is actually solvent and able to pay. The policy behind this principle is to prevent the misuse of the threat of liquidation as undue leverage in ordinary debt disputes. Such misuse has been characterized by the courts as an oppressive or abusive invocation of insolvency jurisdiction.
17. In the Matic General Contractors case [supra], the Court of Appeal emphatically stated:
“It is thoroughly settled now that, on a petition to wind up, no order can be made until the debt is proved, where there is a bona fide dispute as to its existence. But if a man will present a petition to wind up when he has distinct notice that the debt is disputed, and the circumstances show that it is bona fide disputed, and also when he knows that the Company is solvent, if he will have recourse to this vexatious mode of proceeding, ... the duty of the Court ... would be not to suspend the petition, but absolutely dismiss it, with costs. ... This Court ought not ... permit the procedure under the winding up Act to be made the vehicle of oppression.”
18. Further, in Universal Hardware Limited V African Safari Club Ltd, [2013] eKLR) the Court of Appeal reviewed a line of authorities and summarized:
“The thread running through these authorities is that in entertaining a petition to wind up a company on account of non-payment of debts, the court must be satisfied that the debt is not disputed on substantial grounds and is bona fide. If it is, then the winding-up proceedings are not the proper remedy. The substantial dispute must be the kind of dispute that in an ordinary civil case will amount to a bona fide, proper or valid defence and not a mere semblance of a defence. It is not sufficient for a company to merely say, for instance, that ‘we dispute the debt.’ The company must go further and demonstrate on reasonable grounds why it is disputing the debt.” (emphasis added).\
19. Thus, the burden lies on the debtor company to show a credible basis for the dispute and if it does so, the petition ought to be dismissed. Conversely, if the court determines that the alleged dispute is a sham or lacks substance, it may proceed with the insolvency petition. The above passages underscore the fact that where a creditor is aware of a genuine dispute and the company’s solvency, a winding-up petition is considered a vexatious and oppressive tactic and should be met with dismissal.
20. Similarly, in Re Global Trucks Ltd, (Insolvency Petition No. 1 of 2019), the High Court observed that where the claimant’s debt is not clearly established and is subject to controversy, such a claim should be subject of civil litigation” and is “not suitable for insolvency action.
21. Returning to the dispute at hand, the core ground on which the Company opposes the petition is that it does not owe the full £94,010 because the machinery supplied was defective, necessitating £48,000 in repairs. This assertion, if true, raises a significant counterclaim or set-off issue premised on breach of contract. The respondent argues that the machine did not meet the agreed standard or was not fit for purpose, causing loss to the buyer.
22. Based on the evidence presented by the respondent to substantiate its claim, it is my finding that this is a matter that would ordinarily require evidence and possibly a determination of liability. For these reasons, these are issues appropriate for a civil trial where witnesses can be examined and evidence produced, rather than for summary determination in insolvency.
23. Moreover, having considered the evidence before me, I find that the respondent has shown prima facie evidence of a dispute on substantial grounds. The nature of the dispute cannot be resolved without examining the evidence further. The respondent has provided details of the defect and a quantification of £48,000. The fact that the issue has been raised after the statutory demand does not render the dispute a sham. The respondent attempted to strike out the petition which was dismissed for technical reasons, not on merits.
24. The respondent’s audited financial statements show the Company’s assets and its liabilities, and that it operated at a profit in the year under review and has been paying its other creditors in the ordinary course of business. This evidence goes toward proving that the Company is solvent. This shifts the perspective of the case from one of a struggling debtor unable to pay its debt, but rather a solvent company withholding payment due to a commercial dispute. In line with the authorities discussed, when a company is solvent and the debt is bona fide disputed, a winding-up petition is not the proper means of resolving the matter.
25. The proper forum for adjudicating the parties’ rights and liabilities is ordinary civil litigation since the insolvency process does not have a mechanism to determine those liabilities with finality. Its purpose is to ascertain whether a company should continue to exist or be liquidated for the benefit of creditors.
26. I am equally alive to the fact that dismissing this petition will not leave the petitioner without recourse. The petitioner is at liberty to file a civil suit to recover the balance price of the machinery. What the petitioner cannot do, however, is pursue the extreme measure of liquidation as a substitute for establishing its claim in court.
27. Here, the Company’s overall financial health appears sound as per the audited accounts. No other creditor has come forward supporting the petition or alleging unpaid debts. The court must be vigilant to ensure that a solvent company is not unnecessarily destroyed due to a disagreement over a claim. The Insolvency Act was intended to help insolvent companies’ creditors realize assets, not to confer a tactical advantage in contract disputes.
Disposition
28. Accordingly, the petition dated 28th January 2023 is dismissed with costs to the respondent.
DATED, SIGNED AND DELIVERED IN NAIROBI
THIS 22ND DAY OF APRIL 2025.
F. MUGAMBI
JUDGE