1. Before the Court is the Applicant’s Notice of Motion dated 29 September, 2023 seeking, inter alia, an order staying all legal proceedings and execution processes against Youth Dynamix Kenya Limited pending the hearing and determination of this insolvency Petition.
2. The Applicant contends that it is insolvent and has petitioned for its liquidation. It relies on section 428 of the Insolvency Act which grants this Court the discretion to stay or restrain legal proceedings commenced or continued against a company after the filing of a liquidation Petition but before a liquidation order is made.
3. The Applicant further invokes the doctrine of concursus creditorum, as codified under section 432(3) of the Insolvency Act, arguing that once insolvency proceedings commence, the interests of all creditors as a collective ought to take precedence over the individual pursuit of claims. Reliance is placed on In re Cooperativa Muratori and Cementisti – CMC Di Ravenna [2020] eKLR and In re HP Gauff Ingeniure GMBH & Co. KG – JBG [2021] eKLR, where the Applicant submitted that the High Court granted similar orders of stay to preserve the debtor’s estate and ensure equitable treatment of all creditors.
4. The Application is opposed by Sketchers Design Promoters Limited. The Respondent asserts that the Applicant has approached this Court with unclean hands, having failed to notify all its creditors, and only sought to prosecute the insolvency petition and present Application after judgment and execution proceedings were commenced against it. Counsel relied on the decision of the High Court in Re Ukwala Supermarket Limited [2019] eKLR, where the Court declined to grant a stay due to failure to notify creditors and bad faith in the conduct of proceedings.
5. Section 428 of the Insolvency Act provides:
“(1) At any time after the making of a liquidation application, and before a liquidation order has been made, the company, or any creditor or contributory, may—
(a) if legal proceedings against the company are pending in the Court, apply to the Court for the proceedings to be stayed; and
(b) if proceedings relating to a matter are pending against the company in another court, apply to the Court to restrain further proceedings in respect of that matter in the other court.
(2) On the hearing of an application under subsection (1)(a) or (b), the Court may make an order staying or restraining the proceedings on such terms as it considers appropriate.”
6. The discretion to grant a stay under this section is guided by the purpose of insolvency law, which is to protect and preserve the assets of an insolvent company for the benefit of all creditors. In In re Cooperativa Muratori and Cementisti – CMC Di Ravenna (supra), the Court held that “it is essential to halt individual claims to allow orderly administration of the insolvency process and to avoid dismemberment of the debtor’s estate.” Similarly, in HP Gauff Ingeniure (supra), the Court stayed all adverse civil actions, emphasising that the interests of creditors as a whole would best be served by maintaining the status quo.
7. However, the power to stay proceedings is not automatic. It is equitable and must be exercised judiciously, taking into account the conduct of the Applicant and the rights of individual creditors. As stated in Re Ukwala Supermarket Limited (supra),
“a petitioner for liquidation must demonstrate transparency and good faith by properly notifying all creditors and not using insolvency proceedings as a shield against legitimate debt recovery.”
8. In the present case, the Applicant admits that while it published the insolvency petition in the Kenya Gazette, it did not publish it in a daily newspaper of nationwide circulation as required by statute. Further, there has been an unexplained delay of over eight months in prosecuting the Petition, during which time the Respondent pursued and obtained judgment in Milimani MCCOMMSU No. E225 of 2022.
9. The Court is mindful that a successful litigant is entitled to the fruits of their judgment. As observed in Justus Kyalo Musyoka v John Kivungo [2019] eKLR (citing Samvir Trustee Limited v Guardian Bank Limited), the Court must balance the equitable objective of insolvency proceedings with the legitimate expectations of creditors who have diligently pursued their claims.
10. While the principle of concursus creditorum favours staying proceedings to avoid a multiplicity of suits, the Applicant’s failure to comply with notification requirements and its delay in prosecuting the insolvency petition undermine the integrity of these proceedings. I am not minded to condone insolvency petitions being used tactically to defeat lawful execution processes without full disclosure and engagement of all creditors.
11. Accordingly, I decline to grant a blanket stay of all legal proceedings and execution against the Applicant at this stage. However, having considered and noted the contents of the statement of financial affairs of the Petitioner; and to preserve the substratum of the pending insolvency petition; and to prevent prejudice to other creditors who may join these proceedings, I find that it is appropriate to issue a limited order in the following terms:
a. Any new civil suits or fresh execution proceedings against the Applicant commenced after the date of this ruling shall be stayed pending the determination of this insolvency petition;
b. Existing lawful execution processes arising from decrees issued before this ruling shall proceed unless the Applicant demonstrates full compliance with statutory notice requirements and proper engagement of all known creditors;
c. The Applicant shall within 30 days publish notice of the insolvency petition in at least one national daily newspaper as required by law and file an affidavit of compliance.
12. The costs of this Application shall be in the cause.
2. The Applicant contends that it is insolvent and has petitioned for its liquidation. It relies on section 428 of the Insolvency Act which grants this Court the discretion to stay or restrain legal proceedings commenced or continued against a company after the filing of a liquidation Petition but before a liquidation order is made.
3. The Applicant further invokes the doctrine of concursus creditorum, as codified under section 432(3) of the Insolvency Act, arguing that once insolvency proceedings commence, the interests of all creditors as a collective ought to take precedence over the individual pursuit of claims. Reliance is placed on In re Cooperativa Muratori and Cementisti – CMC Di Ravenna [2020] eKLR and In re HP Gauff Ingeniure GMBH & Co. KG – JBG [2021] eKLR, where the Applicant submitted that the High Court granted similar orders of stay to preserve the debtor’s estate and ensure equitable treatment of all creditors.
4. The Application is opposed by Sketchers Design Promoters Limited. The Respondent asserts that the Applicant has approached this Court with unclean hands, having failed to notify all its creditors, and only sought to prosecute the insolvency petition and present Application after judgment and execution proceedings were commenced against it. Counsel relied on the decision of the High Court in Re Ukwala Supermarket Limited [2019] eKLR, where the Court declined to grant a stay due to failure to notify creditors and bad faith in the conduct of proceedings.
5. Section 428 of the Insolvency Act provides:
“(1) At any time after the making of a liquidation application, and before a liquidation order has been made, the company, or any creditor or contributory, may—
(a) if legal proceedings against the company are pending in the Court, apply to the Court for the proceedings to be stayed; and
(b) if proceedings relating to a matter are pending against the company in another court, apply to the Court to restrain further proceedings in respect of that matter in the other court.
(2) On the hearing of an application under subsection (1)(a) or (b), the Court may make an order staying or restraining the proceedings on such terms as it considers appropriate.”
6. The discretion to grant a stay under this section is guided by the purpose of insolvency law, which is to protect and preserve the assets of an insolvent company for the benefit of all creditors. In In re Cooperativa Muratori and Cementisti – CMC Di Ravenna (supra), the Court held that “it is essential to halt individual claims to allow orderly administration of the insolvency process and to avoid dismemberment of the debtor’s estate.” Similarly, in HP Gauff Ingeniure (supra), the Court stayed all adverse civil actions, emphasising that the interests of creditors as a whole would best be served by maintaining the status quo.
7. However, the power to stay proceedings is not automatic. It is equitable and must be exercised judiciously, taking into account the conduct of the Applicant and the rights of individual creditors. As stated in Re Ukwala Supermarket Limited (supra),
“a petitioner for liquidation must demonstrate transparency and good faith by properly notifying all creditors and not using insolvency proceedings as a shield against legitimate debt recovery.”
8. In the present case, the Applicant admits that while it published the insolvency petition in the Kenya Gazette, it did not publish it in a daily newspaper of nationwide circulation as required by statute. Further, there has been an unexplained delay of over eight months in prosecuting the Petition, during which time the Respondent pursued and obtained judgment in Milimani MCCOMMSU No. E225 of 2022.
9. The Court is mindful that a successful litigant is entitled to the fruits of their judgment. As observed in Justus Kyalo Musyoka v John Kivungo [2019] eKLR (citing Samvir Trustee Limited v Guardian Bank Limited), the Court must balance the equitable objective of insolvency proceedings with the legitimate expectations of creditors who have diligently pursued their claims.
10. While the principle of concursus creditorum favours staying proceedings to avoid a multiplicity of suits, the Applicant’s failure to comply with notification requirements and its delay in prosecuting the insolvency petition undermine the integrity of these proceedings. I am not minded to condone insolvency petitions being used tactically to defeat lawful execution processes without full disclosure and engagement of all creditors.
11. Accordingly, I decline to grant a blanket stay of all legal proceedings and execution against the Applicant at this stage. However, having considered and noted the contents of the statement of financial affairs of the Petitioner; and to preserve the substratum of the pending insolvency petition; and to prevent prejudice to other creditors who may join these proceedings, I find that it is appropriate to issue a limited order in the following terms:
a. Any new civil suits or fresh execution proceedings against the Applicant commenced after the date of this ruling shall be stayed pending the determination of this insolvency petition;
b. Existing lawful execution processes arising from decrees issued before this ruling shall proceed unless the Applicant demonstrates full compliance with statutory notice requirements and proper engagement of all known creditors;
c. The Applicant shall within 30 days publish notice of the insolvency petition in at least one national daily newspaper as required by law and file an affidavit of compliance.
12. The costs of this Application shall be in the cause.