Evans Nyagah v Harry Michael Mwangi Ruhiu & 1 other

3. The petition is bad in law as the same fails to comply with relevant requirements under the Insolvency Act. 4. The respondents cannot be sued for complaints against the company in light of the doctrine of legal personality. 3. The PO was canvassed through written submissions. The respondents and the petitioner filed written submissions dated 4th June 2025 and 5th December 2025. 4. The respondents urged the court to allow their PO. They relied on: - 5. 1. Lorna Amimo v Ruke Engineering Works Ltd Winding Up Cause 44 of 2015 [2019] eKLR 2. In re Kipsigis Stores Limited [2017] eKLR 3. Priscilla Jesang Koech v Rebecca Koech & 3 others [2018] eKLR 4. The Law Society of Kenya v Commissioner of Lands & others, Nakuru High Court Civil Case No. 464 of 2000 5. Alfred Njau and Others v City Council of Nairobi (1982) KAR 229 6. Universal Hardware Limited v African Safari Club Limited, MSA CA Civil Appeal No. 2019 of 2007 [2013] eKLR The petitioner urged the court to dismiss the PO with costs. He relied on: 1. Kibe v Old Mutual Holdings PLC [2024] KEHC 16309 (KLR) 2. Oraro v Mbaja [2005] KEHC 3182 (KLR) 3. Patel (Insolvency Cause 1 of 2021) [2022] KEHC 16577 (KLR) Analysis and Determination 6. I have considered the PO and the parties’ respective submissions. The issue for determination is whether the PO is merited. 7. A preliminary objection; a) ‘…consists of a point of law… which if argued…may dispose of the suit’; and b) must not ‘…be blurred by factual details…’ or a ‘…call upon the court to exercise discretion.’ (Mukisa Biscuits Manufacturing Co. Limited v West End Distributors Ltd. [1969] EA 696, Law JA) 8. The first ground is that the petition and application offend sections 17(3(a) and 384(1)(a) of the Insolvency Act and regulations thereunder. 9. The respondents argued that they are natural persons and any bankruptcy proceedings against them should be governed by part III of the Insolvency Act. They posited that the petitioner has not attached any proof of service of a statutory demand upon them. They also submitted that they are not aware of any debt owed to the petitioner in their personal capacity. 10. The respondents highlighted that the petitioner seeks to liquidate River Choice Foods Limited which is not a party to these proceedings. 11. The petitioner argued that section 17 (3) (a) gives provisions for bankruptcy applications commenced by creditors whereas the petition has been filed by a director. He contended that the provision cannot be relied upon in company liquidation proceedings governed by a separate part of the Act. https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/19240/eng@2025-12-17 2

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12. Section 17 (3) (a) of the Insolvency Act provides: “ (3) For the purposes of subsection (2)(c), a debtor appears to be unable to pay a debt if, but only if, the debt is payable immediately and either— a. the applicant creditor to whom the debt is owed has served on the debtor a demand requiring the debtor to pay the debt or to secure or compound for it to the satisfaction of the creditor, at least twenty-one days have elapsed since the demand was served, and the demand has been neither complied with nor set aside in accordance with the insolvency regulations; or” 13. The above section relates to the bankruptcy of natural persons. The petitioner’s application has been filed against the directors of the company. However, the petition is for the liquidation of a company. Therefore, the provision is not applicable to this petition for liquidation of a company. 14. Since the liquidation petition seeks the liquidation of River Choice Foods Limited, the company is the subject of and is the party to the proceedings. Service of Statutory Demand 15. The respondents contended that no statutory demand has been served upon the company or presented to the court to prove that the company is unable to pay its debts within 21 days of service of the demand. 16. For this contention, they relied on section 384 (1) (a) of the Insolvency Act, which provides: “ 384. The circumstances in which a company is unable to pay its debts (1) For the purposes of this Part, a company is unable to pay its debts — (a) if a creditor (by assignment or otherwise) to whom the company is indebted for hundred thousand shillings or more has served on the company, by leaving it at the company's registered office, a written demand requiring the company to pay the debt and the company has for twenty—one days afterwards failed to pay the debt or to secure or compound for it to the reasonable satisfaction of the creditor;” 17. The petitioner submitted that the provision is a condition applicable to creditors not directors. He faulted the respondents for singling out only one sub law to support their claim that this is the only mandatory requirement to determine that a company is unable to pay its debts. He contended that it is only through a full hearing that the court will be able to determine if the conditions under section 384 (1) (b) and (c) have been satisfied. 18. It has been argued that section 384 of the Act is applicable only to a petition filed by a creditor of a company and not its directors. 19. But, critical approach will be concerned that section 384 of the Insolvency Act provides for the circumstances in which a company is unable to pay its debts; and falls under PART VI which deals with liquidation of companies registered under the Companies Act generally, whether voluntary or by https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/19240/eng@2025-12-17 3

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the court, except when otherwise stated (s.381 of the Insolvency Act). Section 384 (1) (b) provides for one of the incidents in which a company is unable to pay its debts and nothing precludes a company or directors from relying on the section in a petition to prove that it is unable to pay its debts. Section 384 will come to bear upon any petition seeking liquidation on the ground that the company is unable to pay its debts. 20. Therefore, the petition for liquidation has been instituted by a director under section 425 (a) of the Insolvency Act. 21. Thus, the contention that the petition contravened Section 384 (1) (b) of the Insolvency Act is neither here nor there. The argument fails. 22. Accordingly, the first ground fails. Locus standi 23. The second ground is that the petitioner lacks the locus standi to institute the liquidation petition. 24. The respondents argued that the applicant has not provided any resolution indicating that the company has resolved to be liquidated; has failed to present any undisputed debts owed by the company and has not demonstrated that he is a significant contributory to the company. 25. The petitioner submitted that there is no dispute that he is a director and that a director can apply for liquidation of a company. He contended that the issues raised by the respondent do not meet the threshold of a PO as they require the court to consider facts and evidence to ascertain the true position. 26. As earlier noted, under section 425 (1) (a) of the Act, a company or its directors can apply for liquidation of a company. This is under Division 6 – Liquidation by the Court not a members’ voluntary liquidation under Division 3 for which a resolution is a prerequisite. 27. The grounds for the instant petition are that the company is unable to pay its debts and that it is just and equitable for the company to be liquidated. 28. Under section 424 of the Act, the court may liquidate a company in several circumstances including the inability to pay debts and if it is of the opinion that it is just and equitable for the company to be liquidated. 29. The claims that the petitioner has failed to present any undisputed debts owed by the company and has not demonstrated that he is a significant contributory to the company require probing of evidence. they are however not idle talk as a petition by a director should annex evidence of undisputed debts which the company is unable to pay when they have fallen due. Generalization will not be enough to sustain a petition for liquidation especially by a director or member of the company as to allow that would be a route for disgruntled directors or members of a company to cripple or kill the company. Insolvency law ushered in new impetus to rescue viable businesses whilst they pay their debts. Without reference to this case, Insolvency law is not an avenue of getting-back on other directors or settling squabbles amongst the directors and members of a company. 30. Thus, whereas the objection on locus standi fails, the petitioner will have to file in court evidence of undisputed debts which the company is unable to pay when they fall due as part of pre-trial documentation and before the petition is listed down for hearing. Appropriate order will be issued thereto. https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/19240/eng@2025-12-17 4

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Legal personality 31. The fourth ground is that the respondents cannot be sued for complaints against the company in light of the doctrine of legal personality. 32. The petitioner relied on section 238 of the Companies Act to argue that a member of a company may institute proceedings seeking relief on behalf of a company. 33. The petitioner also highlighted that the respondents did not submit on the ground. 34. However, the court will consider the fourth ground on the following reasons. First, it was raised as a PO which in its nature does not require copious explanation or submission. Second, the importance of the objection in these proceedings. And, third, in the interests of justice. 35. The doctrine of legal personality was established in Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22. This is the concept that a company is a separate and independent legal entity from its shareholders and directors. 36. In Foss v Harbottle [1843] 2 Hare 461 it was established that the company is the proper entity to sue for a wrong committed against it. 37. However, a derivative claim brought under section 238 of the Companies Act is one of the exceptions to the rule in Foss v Harbottle. A member may also file a proceeding under Part XXIX of the Companies Act for protection of members against oppressive conduct or unfair prejudice. 38. The present proceedings-according to the petitioner- are liquidation petition of a company instituted by a director under section 425 (1) (a) of the Act. The proceedings are distinct from the avenue of a derivative action by a member or minority shareholder under section 238 of the Companies Act. Both are also governed by different regimes of law, rules and requirements and serves very different purposes such that their waters will never mix. 39. The petitioner’s application for injunctive relief against the directors or members of the company as long as it is not within the framing of a derivative suit offends the doctrine of legal personality and the rule in Foss v Harbottle. Similarly, there is no express statutory provision allowing a director to file such an application alongside a liquidation petition. A derivative suit serves to secure the rights and remedies of the company which the majority shareholders or directors may be unwilling to pursue for personal gain or because they are complicit. Oppression remedies also serves useful purposes; it curbs conduct by the majority shareholders which is prejudicial or oppressive to the minority shareholders. But, let these remedies be sought in a derivative suit as per the law. Asset protection 40. Assets for a company that is under liquidation are protected through provisions under the Insolvency Act. 41. Under section 431 (3) of the Act, liquidation is deemed to commence on the date of filing of the petition. 42. Under section 429 of the Act, any dispositions of property by company or transfers of shares or alteration of the status of members of the company after commencement of liquidation are deemed to be void unless the Court otherwise orders. 43. This provision is meant to prevent the directors from selling assets or creating charges, dissipating or hiding assets to defeat the liquidation petition. https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/19240/eng@2025-12-17 5

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44. From the foregoing, the upshot is that the respondents’ PO succeeds only to the extent that the petitioner’s application dated offends the doctrine of legal personality and the rule in Foss v Harbottle. 45. The other grounds raised by the respondents shall be considered during the hearing of the liquidation petition. Disposal 46. The application dated 27.2.2025 is struck out. The costs shall be in the cause. 47. Nonetheless, given the observations by the court, parties are encouraged to pursue alternative justice systems which will produce better outcomes that parties will appreciate; rescue the company, pay debts as well as guarantee investment and returns for the company and the members of the company. Art.159(2)(c) of Constitution. DATED, SIGNED AND DELIVERED AT NAIROBI THIS 17TH DAY OF DECEMBER, 2025 THROUGH MICROSOFT TEAMS ONLINE APPLICATION ----------------F. GIKONYO M JUDGE In the presence of: Ms. Obiero for Ogembo for Applicant No appearance for Respondent CA Kinyua https://new.kenyalaw.org/akn/ke/judgment/kehc/2025/19240/eng@2025-12-17 6

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