Statutory Demands and Liquidation: When a Kenyan Company Will Not Pay

The statutory demand

Section 384(1)(a) of the Insolvency Act, 2015 provides that a company is unable to pay its debts if a creditor owed one hundred thousand shillings or more serves a written demand for payment by leaving it at the company's registered office, and the company then fails for twenty-one days to pay the debt, or to secure or compound for it to the creditor's reasonable satisfaction.

The registered office should be confirmed from an official search before the demand is served, and proof of service should be kept. Section 384(3) allows the threshold to be adjusted by regulations, so the current figure should be checked at the time.

Other ways of showing inability to pay

The demand is not the only route. Under section 384, a company is also unable to pay its debts if:

• Execution on a court judgment in favour of a creditor is returned unsatisfied in whole or in part (section 384(1)(b)).
• It is proved to the court that the company cannot pay its debts as they fall due (section 384(1)(c)).
• It is proved that the value of its assets is less than its liabilities, including contingent and prospective liabilities (section 384(2)).

Who can apply, and on what ground

Section 424(1)(e) provides that the High Court may liquidate a company that is unable to pay its debts. Under section 425(1)(b), an application may be made by a creditor or creditors, including contingent or prospective creditors. The application is filed and conducted by an advocate.

Not for disputed debts

The Court of Appeal has made clear that the winding-up court is not to be used for debt collecting purposes, nor to decide a disputed debt. Where the debt is disputed on substantial grounds, the court decides on the evidence whether to allow the petition to proceed; a dispute raised merely as a tactic, without a genuine basis, will not prevent it: Universal Hardware Limited v African Safari Club Limited [2013] KECA 507 (KLR).

In practice, the demand route suits a debt that has been acknowledged, is supported by clear documents, or has already been reduced to judgment. Where the debtor has raised a credible dispute, an ordinary claim in court or arbitration is the appropriate forum.

Why the demand is effective

Liquidation brings a company's business to an end and places its affairs in the hands of a liquidator. Most solvent companies will pay, or propose terms, rather than face that prospect. For the same reason, the step should be taken only after the debt has been properly verified and the consequences considered, because a liquidation is a collective process for the benefit of all creditors, not only the one who applied.

Before a demand is served

A creditor considering this route should confirm:

• The exact legal name and registered office of the debtor company.
• That the amount is at least the statutory threshold and is supported by invoices, statements or a judgment.
• That the debtor has not raised a genuine dispute about liability or amount.
• Whether any other proceedings are already under way against the company.

Frequently asked questions