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Debt Finance & Insolvency

Insolvency Proceedings Vs Civil Suit for Recovery of Money from a Debtor Company in Kenya

By 16 Jul 2022No Comments

COMMERCIAL LAW

Insolvency Proceedings Vs Civil Suit for Recovery of Money from a Debtor Company in Kenya.

In the face of money owed to you by a company in Kenya, you may wonder which is the better legal strategy to get your money from a Debtor Company? This debt may have arisen in the context of a loan or money owed under a contract whether for the supply of goods/services or any other consideration.

Is there a statutory prohibition on starting insolvency against a debtor company if one has not initiated a civil suit for recovery of a sum of money owed?

No there is no statutory requirement under the Insolvency Act of Kenya that you must first file a civil suit before you commence insolvency proceedings pursuant to this Act. However, in reality some courts do not favour the use of the insolvency process as a pressure point for debt collection or to resolve contractual breaches and will consider factors such as whether the claimed sum is disputed by the company that you want to bring insolvency proceedings against; whether there are other contractual issues in contest raised by the Debtor company which would ultimately need to be decided in order to ascertain that indeed the company is unable to pay its debts.

Is a Civil Suit preferable to Insolvency?

This can only be determined on a case by case basis. It is best to sit down with an experienced advocate to go through your options before you resort to insolvency. Also it is important to note that insolvency is highly procedural and failure to follow the statutorily stipulated steps can affect the case. Additionally, when you file an insolvency suit, there may be creditors with superior claims to yours that you may need to consider.

Which of Insolvency or a Civil Suit is faster?

Both types of proceedings when they move smoothly can take a similar duration. However, note that when it comes to insolvency proceedings you may not be the only creditor to be involved and ultimately there may be objections to a particular creditor’s debt which must be proven and confirmed before insolvency proceeds through its various statutory stages thus significantly slowing down the insolvency. Nevertheless, in Kenya some civil cases may drag on but this would likely be where your opponent is very litigious and files numerous applications to slow down the civil suit for the recovery of a stated amount of money.

Can the Debtor Company stop Either type of proceedings by making an Application to the Court?

It is unlikely for a Debtor to stop proceedings which are initiated through a civil suit for money owed under a contract. This is because provided a suit is not incompetent, frivolous or vexatious, the court will allow the suit to proceed through the normal stages of a civil suit for recovery of a sum of money/damages from the plaint stage to the hearing stage to judgement stage. On the other hand, some courts have been taking a tough stance on insolvency as a debt collection method due to the finality and harshness of liquidating a company and may be inclined to grant an injunction to stop insolvency proceedings if the court finds a civil suit is a better method for you to recover the money owed. There is a considerable likelihood of this where the amount you are claiming as a creditor is disputed.

What if I commence insolvency proceedings against a judgement debtor after a civil suit?

This is fine as this is considered under the civil procedure rules as an acceptable way to recover debt and if the judgement debtor is unable to pay the judgement debt, insolvency proceedings are a legitimate method for the decree holder to get paid. This is instituted through serving the required statutory notice on the judgement debtor.

How can I stop insolvency proceedings wrongly filed against my Company?

Ordinarily you will seek an injunction from the court through filing an application before the said court where insolvency proceedings are instituted against the alleged debtor company. You will provide compelling grounds on why the insolvency proceedings should be halted and the court will also rely on any supporting affidavit and documentary evidence provided to buttress your case.

The provision of general information herein does not constitute an advocate-client relationship with any reader. All information, content, and material in this article are for general informational purposes only. Readers of this article should get in touch with us/a qualified advocate to obtain legal advice with respect to any particular legal matter.

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