Statutory Demand Kenya: Using the Insolvency Act to Recover Business Debts

A statutory demand Kenya creditors serve on a company is a pressure tool with serious consequences, because an unpaid demand is one of the ways the law treats a company as unable to pay its debts. The rule is in section 384 of the Insolvency Act, 2015. This guide explains what the section says, how a demand leads to a liquidation application, how a company can respond, and when a creditor should use a different route.

The legal basis: section 384 of the Insolvency Act

For the purposes of Part VI of the Act, section 384(1) lists the circumstances in which a company is unable to pay its debts:

• a creditor to whom the company is indebted for KES 100,000 or more has served on the company, by leaving it at the company’s registered office, a written demand requiring it to pay the debt, and the company has for twenty-one days afterwards failed to pay the debt or to secure or compound for it to the reasonable satisfaction of the creditor (section 384(1)(a));
• execution or other process issued on a judgment, decree or order of any court in favour of a creditor is returned unsatisfied in whole or in part (section 384(1)(b)); or
• it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due (section 384(1)(c)).

Section 384(2) adds a balance-sheet test, under which a company is also unable to pay its debts if the court is satisfied that the value of its assets is less than its liabilities, including contingent and prospective liabilities. Section 384(3) allows the insolvency regulations to increase or reduce the KES 100,000 amount, so confirm the current figure before you serve a demand. A statutory demand is therefore only the first of several routes to the same conclusion.

What a valid statutory demand should contain

Section 384(1)(a) sets out the minimum: a written demand, left at the registered office, for a debt of KES 100,000 or more, requiring payment. Beyond that, a prudent demand should identify the creditor and the company, state the amount and the basis of the debt (an invoice, a contract or a judgment), show how any interest is calculated, and say clearly that it is a demand under section 384 of the Insolvency Act, 2015. Because a defective demand can be challenged, check the registered office on the company’s current record before you serve, and keep proof of how, when and where the document was left. A sworn affidavit of service prepared straight after service is good practice.

The 21-day period

The company has twenty-one days after service to pay the debt, or to secure or compound for it to the reasonable satisfaction of the creditor. Three outcomes are possible. The company pays, in which case the matter ends. The company and the creditor agree security or a compromise, which the creditor must be reasonably satisfied with. Or the company does nothing, and the ground in section 384(1)(a) is made out.

What happens if the demand is ignored

If the demand stays unsatisfied after the twenty-one days, the creditor can apply to the High Court for the liquidation of the company. Under section 424(1)(e) the court may liquidate a company that is unable to pay its debts. Section 425(1)(b) allows an application by a creditor or creditors, including a contingent or prospective creditor, and section 423 gives the High Court exclusive jurisdiction to supervise the liquidation of companies registered in Kenya. The statutory demand does not itself end the company. It is evidence on which the court can decide the company is unable to pay its debts.

How a company can respond to a statutory demand Kenya courts will see

The bankruptcy provisions of the Act, which apply to individuals, contain a procedure to apply to set aside a statutory demand (sections 17 to 20). The company demand in section 384 contains no equivalent procedure. A company that disputes the debt should therefore say so in writing within the twenty-one days, explain the dispute with documents, and be ready to oppose any liquidation application on that basis. It should also consider an immediate payment of any undisputed part, since a clear record of payment makes the dispute easier to present.

A documented dispute is the strongest response. Whether a particular dispute is enough to defeat an application is a question for the court, so take advice early.

Statutory demand Kenya or an ordinary demand letter

A statutory demand Kenya creditors can serve is not the right tool for every debt. It suits a creditor who is owed KES 100,000 or more by a company that appears to be solvent but slow to pay, and who is prepared to accept that the next step is a liquidation application, with the cost and publicity that follow. It is a poor choice where the debt is genuinely contested, where the debtor is an individual (the bankruptcy provisions apply), or where the creditor wants to preserve the commercial relationship. In those cases an ordinary demand letter, followed if needed by a claim in the appropriate court, is the better step. See our guide to the three-stage demand letter sequence, and the debt recovery route selector to match the debt to a forum.

Unsatisfied judgments

If the creditor already holds a judgment, section 384(1)(b) gives a separate route: execution or other process on the judgment that is returned unsatisfied in whole or in part. That connects the statutory demand to enforcement. A creditor who tries attachment first and fails may rely on the unsatisfied return, as an alternative to serving a demand.

Multiple creditors and rescue options

If a company faces liquidation, a creditor’s application is not the end of the story, because other creditors may have their own claims. Many companies in trouble instead try a rescue route, such as a voluntary arrangement under Part IX of the Act, which can bring a moratorium and a plan the creditors vote on. A creditor who has served a demand should be ready to engage with such a proposal, since a negotiated plan can recover more than a liquidation.