Act On Demand For Payment Within 21 Days Or Risk Liquidation

As per section 384(1)(a) of the Insolvency Act, 2015, a company is to be considered unable to pay its debts and liable to liquidation if it fails to act on or respond to a demand to pay issued by a creditor it owes Ksh. 100,000 or more within 21 days.

This section came to play in the winding-up petition Re F. M. Macharia (K) Limited [2017] eKLR where a creditor owed Ksh. 1.4 Million by a debtor company sought to liquidate it after her demand letter requiring payment of within 21 days went unheeded for 4 months.

In the petition to liquidate the company, the creditor cited as a ground the fact that her formal demand had not been answered or acted upon convincing her that the Company could not pay the debt as provided under section 384 of the Insolvency Act 2015.

The Judge noted that the issuance of a statutory demand is a step that has to be undertaken pursuant to the Companies Act prior to the institution of a winding-up Petition. “The notice is a forerunner to any Petition being lodged and it no doubt operates as the statutory notification of the creditor’s intentions,” stated Justice Onguto in Judgement.

The Court concluded: “The Petitioner (the creditor) has established that it issued a statutory demand for purposes of Section 384 of the Insolvency Act…  The notice or demand was not heeded and the consequence was this Petition… Accordingly, I find that the Petitioner has established that the Company is unable to pay its debts.”

The Court found that under Section 384 of the Insolvency Act 2015, the prayers sought in the Petition were merited and entered a judgment the Company F. M. Macharia (K) Ltd be liquidated under the provisions of the Insolvency Act, 2015 and the Official Receiver act as the liquidator of the Company.

The key take-away is that as a company owner if you receive a demand for payment for Ksh. 100,000 or more for any debt, it is advisable to respond even if disputing the debt or proposing a settlement as otherwise failing to respond may be used as proof of inability to pay.

Mr. Musyimi is an Advocate of the High Court of Kenya and the CEO of Legal360 Advocates fb.com/legal360. For questions or comments email: info@legal360.co.ke or call: 0781360360.