KENYA Trends and Developments Contributed by: Noella Lubano, Paul Kamara, Kateline Mang’ich and Anne Cheloti, Oraro & Company Advocates
This was done in the spirit of ensuring substantive justice in line with Article 159 of the Constitution of Kenya 2010, read together with Section 696 (1) of the Insolvency Act, which provides that insolvency pro - ceedings, including liquidation, should not be invali - dated because a step has been missed. Despite the above, Kenyan courts have consistently held that it is mandatory to issue a valid statutory demand before filing a liquidation petition, in line with the provisions of Section 384 (1)(a) of the Insolvency Act and Regulation 77B(2)(a) of the Insolvency Regu - lations. Once a statutory demand is issued and filed with the court, the company may challenge such demand. However, the dilemma faced by many companies is that there are no express legal provisions on how statutory demands issued to artificial persons are to be set aside. Instead, Regulations 16 and 17 of the Insolvency Regulations provide for instances where a statutory demand to place a person under bank - ruptcy may be challenged. To fill in this gap, the High Court held in Sun Transfer Kenya Investments Lim- ited v Solar Connect EG (Insolvency Notice E021 of 2021) [2022] KEHC 270 (KLR) that the principles in Regulation 17 (6) are still applicable to companies. Furthermore, the Insolvency Court has inherent pow - ers to strike out a statutory demand that is not well founded, as was held in Mihrab Development Limited v Cementers Limited [2023] KEHC 20004 (KLR). As such, applications to strike out statutory demands are currently made pursuant to the inherent powers of the Insolvency Court. Kenyan courts frown upon the use of liquidation pro - ceedings as a debt collection mechanism due to the irreparable and adverse impact they will have on the company. This is because the advertisement of the liquidation of a company may harm the company’s reputation, and the company may never recover or go back to its initial position. As such, when a statutory demand is contested, the court will have to analyse the demand to ensure that the company is placed under liquidation on substan - tial grounds. Therefore, the court may set aside a statutory demand on the grounds that:
• the company has a counterclaim, set-off or cross- demand against the creditor that is equal to or exceeds the debt claimed in the statutory demand; • the debt is disputed on substantial grounds; • the creditor holds some security for the debt demanded and said security is equal to or exceeds the value of the debt, even after a demand has been issued; or • the court is satisfied that there are other grounds which provide that the demand should be set aside. Furthermore, if a statutory demand is not contested or is found to have been validly issued, the creditor is allowed to institute liquidation proceedings against the company. The court will interrogate the liquida - tion petition to determine the intention of the creditor in instituting the liquidation proceedings, whether a debt indeed exists, and whether the debt is substan - tially disputed. Should the court be of the opinion that there is no debt or that the creditor is using the court as a debt collection mechanism, then the liquidation petition will be set aside or dismissed, as it will be an abuse of the court process, as was held in Re the Mat- ter of Rumorth Group Of Companies Limited [2015] KEHC 8379 (KLR) and Nairobi Business Ventures Limited v Greenhills Investment Limited [2021] KEHC 6962 (KLR). Furthermore, if it is proven that the debt is disputed, then orders to liquidate a company will not be granted, as was held by the Court of Appeal in Kevian Kenya Limited v Hipora Business East Africa Limited [2025] KECA 1195 (KLR). However, despite all these safeguards, Kenyan credi - tors still use liquidation proceedings to pressure com - panies to repay their debts. The court will therefore only place a company under liquidation if it is satis - fied that it is unable to pay its debts. A company is deemed unable to pay its debts under the following circumstances: • if a 21-day statutory demand has been issued to the company and it fails to pay the debt or to rea - sonably satisfy the creditor on it; • if execution by a decree or order issued in favour of the creditor remains wholly or partially unsatisfied; or
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