In re Johnson Mwendwa Muthengi (Debtor/Applicant) [2022] KEHC 15657 (KLR)

In re Johnson Mwendwa Muthengi (Debtor/Applicant) (Insolvency Cause E010 of 2021) [2022] KEHC 15657 (KLR) (Commercial and Tax) (14 October 2022) (Ruling)

Neutral citation: [2022] KEHC 15657 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Insolvency Cause E010 of 2021

DO Chepkwony, J

October 14, 2022

Ruling

1. Vide the Notice of Motion application dated February 19, 2021, the debtor/applicant has sought to be allowed the following prayers:a.Spent;b.That the honourable court do issue an order declaring the debtor/applicant bankrupt pending hearing and determination of the Petition.c.That a receiving order does issue and the official receiver be constituted the interim Trustee of the debtor/applicant pending hearing and determination of the Petition.d.That there be stay of execution and proceedings in all suits filed against the debtor/applicant pending hearing and determination of the Debtor’s Insolvency Petition.e.That the court be pleased to issue any other orders expedient in the circumstances and in the interest of justice.

2. The application is premised on among other grounds that the debtor/applicant has a pending suit in which he has been sued and some judgment and decrees made against time. The debtor/applicant avers that he is has been called upon to settle those decrees and he has no known source of income to service the debts that he has ended up in pecuniary embarrassment and continued financial loss for the often-increasing interest which he describes as prejudicial to him. He urges that unless the orders sought and/or orders for stay of proceedings made, he stands to suffer further expenditure and embarrassment.

3. Those grounds are further explicated in the affidavit sworn by the debtor on February 19, 2021in support of the application. He avers therein that by the time he filed the present bankruptcy Petition, he had been enjoined as a third party and sued with two others by one James Mulwa Ndiku as the representative of the estate of Mark Ndiku Mulwa in Kitui Chief Magistrates Court Civil Case No.12 of 2009 in respect of a road traffic accident involving his (applicant’s) motor vehicle wherein the deceased suffered fatal injuries. On May 15, 2012, the trial court in Kitui C.M.C.C No.12 of 2009 made Judgment for Kshs.1,775,547. 00 in favour of theplaintiff therein which has now been claimed vide a proclamation dated September 6, 2020taken by Kande Auctioneers attaching his properties. In addition to that, the said firm of Auctioneers are claiming their fees in the sum of Kshs.222,963. 00 bringing the total debt to Kshs.1,998,530. 00. Albeit, the trial court ruled that the applicant settles 60% of the decretal sums, the applicant’s inability to settle the debts is more than a perturbation to him.

4. According to the applicant, he was neither served with the third-party notice and was all along unaware of the suits taken against him until he was served with warrants of attachment. Nonetheless, his requests for leave to appeal against the impugned Judgment and applications to stay the execution have been declined by both Kitui High Court and Magistrates Court albeit he has a pending application in the former court vide Kitui High Court Misc. Civil Application No.08 of 2021. In that situation, he craves for the court to grant the stay orders to stall the intended executions in addition to issuing the bankruptcy orders to save him from further financial embarrassments on debts he is unable to settle.

5. The application is opposed vide the replying affidavit of James Ndiku Mulwa, the Decree Holder in Kitui Chief Magistrates Court Civil Case No.12 of 2009. In his view, the application has been brought in bad faith with the sole intention of defeating justice for among other reasons that the applicant was represented by a firm of advocates in the primary suit and cannot allege to have known of that suit which culminated into a Judgment against him. Further, that the Applicant has in any event filed numerous applications which are inclined to evading the payment of the decretal sum but all have been dismissed for want of mer. Similarly, the application alleged to be currently pending before Kitui High court was dismissed for non-attendance. He further deponed that the Applicant has not denied being the owner of the items and properties proclaimed by auctioneers which can be sold to partly settle the debt. That notwithstanding, the proclamation was done on September 7, 2020, but theapplicant waited for more than seven (7) months to file the bankruptcy proceedings and is thus guilty of laches.

6. In the deponent’s view, the applicant is merely forum shopping in the hope that he will finally evade his debts payment obligations if that is legally permissible, then the court would be opening a flood gate for applications by debtors seeking to evade debts and instead be declared bankrupt. That notwithstanding, the applicant has not declared all the estate he wishes to be taken over by the official receiver. For those reasons the court is asked to dismiss the application for want of merit.

7. The application was canvased by way of written submissions, and as the record reflects whereby the debtor/applicant filed submissions dated April 28, 2022whilst therespondent’s applications are dated June 15, 2022. Whereas the applicant submits that he has made a case to warrant the issuance of the orders for stay of execution as well as the bankruptcy orders by demonstrating that the primary suit in which judgment was entered against him proceed without his participation, the respondent thinks otherwise. According to him (respondent) to him none of the grounds advanced by the applicant are viable enough to grant the orders sought.

Analysis and determination 8. I have considered the application, the affidavits sworn in support and in rebuttal thereof, the rival submissions made on behalf of the parties as well as the authorities relied on. In my humble view, the issues standing out for determination at this juncture are whether:-a.The applicant can be declared bankrupt.b.A receiving order can issue, and the official receiver be constituted interim trustee of the applicant’s estate.c.The court can order stay of execution and proceedings against theapplicant pending the determination of the Insolvency Petition herein.

Whether bankruptcy order can issue 9. It ought to be remembered that bankruptcy orders are aimed to give a distressed debtor a second chance where it is shown that the application is made in good faith and that the applicant is factually and commercially insolvent. In other words, the debtor has the onus to show that his liabilities exceed his assets, and he/she is unable to pay his debts as and when they fall due for payment. The petitioner’s case has to be firmly asserted in the applicant’s affidavits and the key issue for consideration before the bankruptcy order is made, is whether the Applicant has proven at least on a prima facie case that he is unable to pay his debts. This may be achieved by the Applicant adducing evidence of his liabilities and the market value of his assets as at the time of the application.

10. I wholly adopt and associate myself with the sentiments in the English case ofCorner Shop (Pty) Ltd v Moodley 1950 (4) SA 55 (T) at p 60, where the court observed that;“The inability to pay a debt should not be taken out of its context, for it may be “consistent with a state merely of temporary financial embarrassment” or due to “commercial insolvency” in circumstances where a Debtor’s liabilities do not exceed the value of his assets.” At the same time, one must bear in mind the principle that the court will not make an order for compulsory bankruptcy on the ground of general insolvency unless the facts are clearly proved”

11. Coming closer home, the court in the case of In the matter of Ali Jillo Fallan (Insolvency Cause No.6 of 2018) [2021] had the following to say;“The proper approach in deciding the question whether a Bankruptcy order should be issued on this ground appears to me, to be that, if it is established that an individual is unable to pay his debts, in the sense of being unable to meet the current demands upon it, his day to day liabilities in the ordinary course of his business, it is in a state of commercial insolvency; that he is unable to pay his debts may be established by proper evidence.”

12. On the same wavelength, section 32(2) of the Insolvency Act on the same wavelength stipulates as follows:-“2) The court may decline to deal with such an application if it is not accompanied by a statement of the debtor’s financial position containing—(a)such particulars of thedebtor’s creditors and of the debtor’s debts and other liabilities and assets as may be prescribed by the insolvency regulations; and(b)such other information as may be so prescribed.

13. Flowing from the above discussion, a bankruptcy order may only be issued upon full disclosure by way of affidavit evidence by the applicant of all his assets to the satisfaction of the court that his liabilities exceed such assets hence he is unable to pay his debts as they fall due. The same should not be confused with mere financial embarrassments in circumstances where adebtor’s liabilities do not exceed the value of his assets.

14. In addition, and pursuant tosection 32(2) of the Insolvency Act reproduced above, the court can only make the bankruptcy order upon considering the debtor’s statement of financial position but not based on an affidavit expressing dissatisfaction on judgment entered against the debtor and the financial embarrassment it has caused on him as the applicant herein implores the court to do. worse still, the affidavit sworn in support of the application at hand does not disclose any of the debtor’s assets other than merely indicating that he is of unknown income to enable the court weigh on his solvent state. Consequently, for those reasons and finding that the applicant has not made a case worthy of his prayer, this court declines make the bankruptcy order pending the hearing of the petition as sought.Whether to make a receiving order and the official receiver be constituted interim trustee of theapplicant’s estate

15. Section 33 of the Insolvency Act is relevant in answering the issue at hand.It reads as follows:Appointment of insolvency practitioner by thecourt1. Subject to section 34, on the hearing of adebtor’s application, the court may not make a bankruptcy order if it appears to the court—(a)that if a bankruptcy order were made the total amount of the applicant’s debts, so far as unsecured, would be less than the small bankruptcies level;(b)that if a bankruptcy order were made, the value of the bankrupt’s estate would be equal to or more than the prescribed minimum value;(c)that, during the five years immediately preceding the debtor’s application, the debtor has—(i)neither been adjudged bankrupt; nor(ii)made a composition with thedebtor’s creditors in satisfaction of the debtor’s debts or a scheme of arrangement of the debtor’s financial affairs; and(c)that it would be appropriate to appoint an authorised insolvency practitioner to prepare a report undersection 34. 2.If, on the hearing of the application, it appears to the court that it would be appropriate to make an appointment as referred to in subsection (1)(d), the court shall appoint an authorised insolvency practitioner in relation to the debtor—(a)to prepare a report under section 34; or(b)subject to Division 1 of Part IV, to act in relation to any voluntary arrangement to which the report relates as supervisor for the purpose of supervising its implementation3. In this Section—(a)“prescribed minimum value” means the amount for the time being specified in the insolvency regulations for the purposes of this Section;(b)“small bankruptcies level” means the amount for the time being so specified for the purposes of this Section.

16. In my view, a close reading on the section 33 above, leads to the conclusion that a receiving order may be made once the debtor is adjudged bankrupt and thereafter the Official Receiver is thereby constituted a receiver of the property of the debtor. Since the court has declined the request to adjudge thedebtor/applicant herein bankrupt at this juncture, it also follows that the receiving orders cannot be made at this stage of the proceeding.Stay of execution and proceedings against the applicant pending the determination of the Insolvency Petition herein.

17. Lastly on whether to grant the orders of stay of execution and proceedings against the debtor pending the hearing and determination of the Insolvency Petition, this court takes judicial notice to the fact that the applicant has made similar applications for stay before the courts which have so far heard the dispute including Kitui High court and the requests have been declined. Nonetheless, the grounds upon which the applicant is now seeking to be granted the stay of execution and of proceedings are not any different from the grounds adduced before the previous courts that the applicant was never served with the third-party notice or otherwise made aware of the suits against him and that the Judgment and Decree entered therein have dragged him to financial embarrassments.

18. It is trite in law that anapplicant seeking for stay of execution is obliged to satisfy the conditions set out in Order 42 Rule 6(2) of the Civil Procedure Rules, namely:-a.that substantial loss may result to the applicant unless the order is made;b.that the application has been made without unreasonable delay; andc.that such security as the court orders for the due performance of such decree or order as may ultimately be binding on the applicant has been given. it is noteworthy that the applicant has not endeavoured to satisfy those conditions. In my respectful view, theapplicant’s fears are propelled by the fact that the process of execution has been put in motion, which does not amount to substantial loss or proof of any other ground for stay of execution.

19. Lastly, in considering whether it would be in the interest of justice to order stay of proceedings against the debtor, it must be remembered that the test for stay of proceedings is high and stringent since it is a grave judicial action which seriously interferes with the right of a litigant to conduct his litigation, as it impinges on right of access to justice, right to be heard without delay and overall, right to fair trial. Given the history of the dispute leading to the present insolvency proceedings, I am not convinced that the applicant has demonstrated tangible grounds to warrant grant of such orders, only to sacrifice the respondent’s right to hearing to the alter of shielding the applicant from execution on alleged financial distress. After all, execution is a legally provided for process. That prayer is likewise denied.

20. Accordingly, I find no merit in the application dated February 19, 2021. It is therefore dismissed with costs to the Respondent.

It is so ordered.

JUDGMENT DELIVERED VIRTUALLY, DATED AND SIGNED AT NAIROBI THIS 14TH DAY OF OCTOBER, 2022. D. O. CHEPKWONYJUDGEIn the presence of:M/S Mbilo counsel for RespondentNo appearance for and by ApplicantCourt Assistant - Sakina