APPLICATION TO SET ASIDE STATUTORY DEMAND

Setting aside of a statutory demand is dealt with under section 16 and 17 of the insolvency
regulations in Kenya. Section 16 stipulates that a debtor may apply to court within 21 days of
receiving service of the statutory demand for the setting aside of the demand, or on the
appearance of the demand on the newspaper.

The time for compliance of the statutory demand ceases to run once the application to set it
aside is lodged in court. The application for setting aside the statutory demand is done through
form 7 accompanied by an affidavit-form 8, both set out in the first schedule of the regulations.

Section 17 sets out how the court handles the application once it’s lodged in court. This is
where the court can dismiss it if it finds no sufficient cause is shown for the setting aside of the
statutory demand. If the court is satisfied that sufficient cause has been shown, the court sets a
date and venue for the hearing and determination of the application.

If the application is dismissed, the court makes an order authorizing the creditor to present the
insolvency application immediately or at a later date to be set by the court.

Case law

Peter Munga vs African Seed Investment Fund LLC (2017) eKLR

The court held that;

“It is important to point out that the mere overstatement of amount claimed in a statutory
demand does not perse invalidate the demand. The debtor is obligated to contest the amount
and within the requisite period and additionally it must be such as to cause prejudice and
injustice to the debtor if the demand was allowed to subsist.”

Joshua Mbithi Mwalyo vs Sillvya Wanjiru Merie(2017) eKLR

The applicant in this case gave a notice period of 7 days in the statutory demand instead of the
21 days provided in the insolvency regulations. The applicant also overstated the amount owed
by the debtor. The court however did not set aside the statutory demand but said that an
overstatement does not invalidate the demand, but the error should just be corrected.
Invesco assurance company ltd vs Dama Chari Nzai & 57 others (2019) eKLR

Through a statutory demand filed on 15th November, 2018 issued pursuant to Section 384 of the
Insolvency Act, 2015 and Regulation 17b of the Insolvency Regulations, 2016, Dama Charo Nzai
and 57 other creditors who are now the respondents intimated to Invesco Assurance Co. Ltd, the
Debtor/Applicant that unless the Applicant paid various sums of money owed to the
respondents within 21 days from the date of the notice, the respondents would proceed to file
for a liquidation order against the Applicant. The court held that overstatement cannot
invalidate the statutory demand and suspended the notice for 60 days for the debtor to comply.

In ABC Constructions No 1 Pty Ltd v Bonelli Constructions Pty Ltd (Australian case) the court
held that

The applicant has established there is a genuine dispute between it and the respondent about
the existence or amount of the debt the subject of the statutory demand. This conclusion
renders it unnecessary to determine whether the applicant has established it has a genuine off-
setting claim. (The parties were in conflict as to the existence of the subject of the statutory
demand due to the fact that there was a case of breach of contract hence the subject was non-
existent)

In TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd (Australian case)Dodds-Streeton
JA said:

The court, in the context of an application to set aside a statutory demand, must determine
whether there is a genuine dispute about the existence or amount of the debt or whether the
company has a genuine off-setting claim. No in-depth examination or determination of the
merits of the alleged dispute is necessary, or indeed appropriate, as the application is akin to
one for an interlocutory injunction. Moreover, the determination of the “ultimate question” of
the existence of the debt should not be compromised.

In Transmission Corporation of Andhra Pradesh Limited vs Equipment Conductors and Cables

Limited Civil Appeal No. 9597 of 20181 [decided on 23.10.2018] (India), the court held that

The Supreme Court relied on the decision in Mobilox case and held that while examining an
application under Section 9 of the Act, the Adjudicating Authority will have to determine (i)
Whether there is an "operational debt" as defined exceeding Rs 1 lakh, (ii) Whether the
documentary evidence furnished with the application shows that the aforesaid debt is due and
payable and has not yet been paid and (iii) Whether there is existence of a dispute between the

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parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt
of the demand notice of the unpaid operational debt in relation to such dispute.

In Palmer Petroleum Pty Ltd v BGP Geoexplorer Pty Ltd, The Queensland Supreme Court
determined that the presence of an arbitration clause is not sufficient ground to set aside a
statutory demand.

APPOINTMENT OF INTERIM RECEIVER:

At any time after the presentation of the petition and before a receiving order is made the
court may if it is shown to be necessary for the protection of the estate appoint the official
receiver to be interim receiver of the property. The official receiver may himself appoint a
special manager to conduct the business of the debtor. The court may also stay any action
execution or other legal process against the property or person of the debtor.

An Interim Receiver is only appointed when there is evidence that the debtor’s assets are in
jeopardy and the appointment is necessary for the protection of the debtor’s estate. An Interim
Receiver is an officer of the Court and generally acts as a custodian on behalf of a creditor(s). An
Interim Receiver is a distinct and separate function from a Receiver.

An Interim Receiver is appointed on a temporary basis. Its appointment will end on the earlier
of: the appointment of a Receiver by a secured creditor, court approval of a Proposal filed by
the Debtor, the appointment of a Trustee of a bankrupt company, or 30 days after the date of
the Interim Receiver’s appointment, unless the court specifies a different period.

Appointment of a receiver is done or notice given to the court by way of form 35-part IV of the
Insolvency Act. This can be done by the debtor or the creditor.

Case law
Newhart Developments v. Co-operative Commercial Bank

Surya Holdings Limited & 2 others v CfC Stanbic Bank Limited [2015] eKLR
Queensway Trustees Limited Vs Official Receiver & Liquidator Of Tanneries Of Kenya Limited)
[1983] eKLR

In Crawford V. Ross', 39 Ga 44 (Z28), the court stated that;

"The high prerogative act of taking property out of the hands of one and putting it in pound
under the order of the Judge ought not to be taken except to prevent manifest wrong
imminently impending."

In 'Dozier v. Logan', 101 ga 173 (Z29) Atkinson J. said "The appointment of a receiver is
recognised as one of the harshest remedies which the law provides for the enforcement of rights
and is allowable only in extreme cases and in circumstances where the interest of the creditors is
exposed to manifest peril,"

In T. Krishnaswamy Chetty vs C. Thangavelu Chetty And Ors. on 6 December, 1954 the court
stated that;

The five principles which can be described as the "panch sadachar' of our Courts exercising
equity jurisdiction in appointing receivers are as follows :

1. The appointment of a receiver pending a suit is a matter resting in the discretion of the
Court
2. The Court should not appoint a receiver except upon proof by the plaintiff that prima
facie he has very excellent chance of succeeding in the suit
3. Not only must the plaintiff show a case of adverse and conflicting claims to property,
but, he must show some emergency or danger or loss demanding immediate action and
of his own right, he must be reasonably clear and free from doubt.
4. An order appointing a receiver will not be made where it has the effect of depriving a
defendant of a 'de facto' possession since that might cause irreparable wrong.
5. The Court, on the application of a receiver, looks to the conduct of the party who makes
the application and will usually refuse to interfere unless his conduct has been free from
blame.