IN THE MATTER OF ABDUL RAHIM ISMAIL AND IN THE MATTER OF THE BANKRUPTCY ACTCAP. 53 LAWS OF KENYA [2004] KEHC 2524 (KLR)

Full Case Text

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA

AT NAIROBI (MILIMANI COMMERCIAL COURTS)

Bankruptcy Cause 59 of 2004

IN THE MATTER OF ABDUL RAHIM ISMAIL

AND

IN THE MATTER OF THE BANKRUPTCY ACTCAP. 53 LAWS OF KENYA

RULING

This Ruling is very much similar to the Ruling in the matter ofMrs. Amina Hajji, Ex parte the Debtor in Bankruptcy Cause No 58 of2004, and the reasoning in that case applies largely to this cause asthe applications, the grounds and the Supporting Affidavits areidentical, except for the names of the Petitioners, one of whom in thiscause is called Abdul Rahim Ismail.

On 19th April 2004, the Applicant Mr. Abdul Rahim Ismailpresented a bankruptcy petition under the provisions of Section 5 ofthe Bankruptcy Act, Chapter 53, Laws of Kenya (the Act) for areceiving order for the protection of his estate. When the petition wasplaced before my sister, Lady Justice Kasango on 26th April 2004,she declined to issue a receiving order "because the debts alleged to2 be due and the debtor is unable to pay are debts payable by Target Carriers Limited".

In the application dated 30th April 2004 and filed on the same day under a Certificate of Urgency by his Advocates, Alex Karanja Ndungu & Co. the Petitioner seeks a variation of the Court's order made on 26th April 2004 declining to make a receiving order against the Petitioner. The Petitioner swears in his Supporting Affidavit,

Paragraph 6 -

"That almost all the debts listed as being payable byTarget Carriers Limited are actually personallyguaranteed by the Directors including myself makingme liable to court action,"and in paragraph 9 -

9. "That the list of creditors above was not meantto be held together with the statement of affairsbut was meant to assist my Advocates prepareall the documents for presentation to the court."

and in paragraph 10

10. That the inclusion of the list was merelyinadvertent and was not meant to mislead thecourt at all."

The application is expressed to be brought under the provisionsof Sections 3(1) (f) 11, 97, 100, & 133 of the Act and Rules 1, 15, 16 and 144 of the Bankruptcy Rules and all enabling provisions of thelaw. The application prays for orders that-

(a) The court do vary the order it made on 26. 04. 2004

(b) A Receiving Order be issued in respect of theestate of the Petitioner,

The application is grounded on the grounds-

(1) that the Petitioner has consciously and after careful consideration of the consequences voluntarily presented this petition,

(2) that the petition has as an individual fallen into bad times and has completely been overwhelmed by his commercial obligations to adopt this painful course of action.

(3) that the company Target Carriers Limited whose list of creditors was inadvertently filed together with the statement of affairs was not meant to be filed and almost all the debts included therein were incurred by the petitioner and are due from him.

(4) that it is meet and just that the orders sought by the petitioner(s) be granted to enable the Official Receiver to take delivery of the petitioner(s) estate. For completeness of the record and the eventual conclusionand decision in this Ruling, I set out below the various provisions ofthe Bankruptcy Act and the Bankruptcy Rules (the Rules) upon whichthis application is brought. Section 3 of the Act lists the various actsof Bankruptcy. Section 3(1) (f) declares that a person commits an actof bankruptcy if he files in the court a declaration of his inability to payhis debts or presents a bankruptcy petition. Section 11 of the Actgrants the court jurisdiction to stay any action or other legal processagainst the property of the person of the debtor, and on proof ofpresentation of a petition, the court may either stay the proceedingsor allow them to continue on such terms as it may think just. Section97 of the Act invests the jurisdiction in bankruptcy in the High Court,unless specifically or generally delegated by the Chief Justice to anysubordinate Court. Section 100 of the Act grants the court "full powerto decide all questions of priorities, and all questions whatsoever,whether of law or fact, which may arise in any case of bankruptcycoming within its cognizance, or which the court may deem fit for the purposes of doing complete justice or making a complete distributionof property in any such case.

In a real sense, Section 100 is both an enabling provision, anda consequential provision upon the onset and finalization orcompletion of a bankruptcy situation. Its effect would be felt more atthe conclusion or release of the debtor from the clutches ofbankruptcy.

Section 133, will be the issue in this ruling. No proceedings inbankruptcy shall be invalidated by any formal defect or by anyirregularity, unless the court before which an objection is made to theproceeding is of the opinion that substantial injustice has beencaused by the defect or irregularity, and that the injustice cannot beremedied by any order of the court". S.133 (1), and "no defect orirregularity in the appointment or election of a receiver, trustee ormember of a committee of inspection shall vitiate any act done by himin good faith."

Reference to rule 1 of the Bankruptcy Rule in the Petitioner'sapplication is not understood as this reference is merely to the shorttitle and application of the Rules, and is thus of no consequence tothis application. Rule (5) requires that an application under the Act shall be brought by way of motion on notice (Rule (5), and the courtwill ordinarily not make any order which may affect another personunless that person has given his consent to be shown to the court, orupon proof that notice of the intended motion and a copy of theaffidavits in support thereof have been duly served upon that party,(Rule 16).

An ex parte order will only be made where the court is satisfiedthat delay in proceeding in the ordinary way would entail seriousmischief, and the ex parte order would be made on terms on costsand otherwise, and may be subject to such undertaking (if any) as thecourt may think just and any party affected may move to set the exparte order aside. Rule 144 is akin to section 11 of the Act, andprovides that there may be included in a receiving order an orderstaying any action or proceedings against the debtor or staying theproceedings generally.

The above completes my survey of the applicable or enablingprovisions of the Act and the Rules. When this cause went before mysister, Justice Kasango, she declined to issue a receiving order. Touse her very words I decline to issue a receiving order because the debts which the alleged debtor states that he is unable topay are debts payable by TARGET CARRIERS LIMITED"

The application in issue seeks orders "to vary the order made on 26. 02. 2004". The ground in support of that prayer is contained in paragraphs 6 of application, of the Supporting Affidavit of Abdul Rahim Ismail, - and it is in these terms:-

"That almost all the debts listed as being payable byTarget Carriers Ltd are actually personallyguaranteed by the Debtors including myself makingme liable to court of action."

Ground 3 of the grounds in both causes are identical -

"That the Company Target Carriers Limited whose listof creditors was inadvertently filed together with thestatement of affairs was not meant to be so filed andalmost all the debts included therein were incurred bythe Petitioner(s) personally and are due from him."

I want to believe that when my sister Lady Justice Kasangodeclined to issue the receiving order in both causes, she must havehad at the back of her clear mind, the good old case of Salmon vs.Salmon & Co. Ltd the leading case that held that Mr. Salmon andSalmon & Co. Ltd are two separate legal entities, and debts by oneare not necessarily the debts of the other. This concept is today embodied in Section 16 of the Companies Act, (Cap. 486) that uponthe date of incorporation mentioned in the Certificate of Incorporation,the subscribers to the memorandum of association and other personswho may later become members of the company become a bodycorporate by the name contained in the memorandum, capable ofexercising all the functions of an incorporated company with power tohold land and having perpetual succession and a common seal, butwith such liability on the part of the members to contribute to theassets of the company in the event of its being wound up.

For the petitioners to want to assume the liabilities of the company Target Carriers Ltd. merely by their declaration so, is a matter that calls for a little more proof. Reference has been made to personal guarantees. How were these guarantees made? Weobserve that the creditors list of Target Carriers Ltd as at 30thNovember 2003 contained some well-known petroleum products suppliers, and the other well-known names in the motor vehicle industry.

In as much as the Petitioner seeks the protection of the court ofbankruptcy cognisance must also be taken of the needs of thosecreditors outside there who are unaware of the Petitioner's move and will only be caught and barred from pursuing their legitimate claimswith the defence of a receiving order staying all current andprospective litigation. The court of bankruptcy will therefore nothesitate to decline to issue a receiving order in bankruptcy wherethere is even a whiff of suspicion that the petition is brought largely todefeat the legitimate claims of a large number of creditors like in thepresent case. This would really be an abuse of the process of theCourt, Re Bond (1888) 21 QBD 17. The clear intention of thebankruptcy legislation being that a debtor should be enabled to puthis affairs together during the period of the receiving order and beprotected from the pressure of a committal order by obtaining anadjudication in bankruptcy against himself, he must come to courtwith clean hands. He must show how the debts of Target CarriersLtd suddenly became his. For there is a method, a way, a procedurefor dealing with such or delinquent companies like Target CarriersLtd, that way is not through or by its directors seeking receivingorders.

To avoid therefore an abuse of the process of court, and as thePetitioners, Abdul Rahim Ismail has stated on oath in his SupportingAffidavit that the debts of Target Carriers Ltd were personally guaranteed by him, let the petitioner make full disclosure before the receiving orders can be granted, how he guaranteed these debts before he can be afforded the protection of the bankruptcy court. These disclosures will enable the court to decide on the matters of the receiving orders, and thus do complete justice as envisaged under Section 100 of the Bankruptcy Act.

For these reasons, I decline to vary the order made on 26th April2004 by Lady Justice Kasango and also decline to issue the otherorders sought. The Application filed by Mr. Abdul Rahim Ismail inBankruptcy Cause No. 59 is dismissed with costs.

Dated and delivered at Nairobi this 31st day of May 2004.

M. J. ANYARA EMUKULE

JUDGE