Last updated on August 16th, 2024 at 09:09 am
The High Court of Uganda has affirmed that a winding-up petition is not the appropriate avenue for resolving debt disputes.
This was in the case of Fravolt Technical Services Limited, where shareholders sought to wind up the company alleging its inability to pay outstanding debts.
The High court, presided over by Lady Justice Harriet Grace Magala, dismissed the petition in a Judgement delivered on Thursday, 7th August, 2024, on the ground that the petitioners had not proven the grounds for winding up as laid down in the Insolvency Act, particulary Section 2.
The shareholders of Fravolt Technical Services Limited had argued that the company was insolvent because it could not pay an outstanding debt of UGX 221,079,886 owed to Uganda Revenue Authority (URA), UGX 11M to Uganda National Bureau of Standards (UNBS), UGX 5M to employees in salary arrears, and UGX 3M in rent arrears.
In response, URA contested the petition, stating that the company had an unpaid tax liability of UGX 244,364,659 instead. URA further argued that the petitioners had not complied with the statutory requirements necessary to demonstrate the company’s inability to pay its debts that is; failure to comply with a statutory demand or a Judgement execution decree as provided for in Section 2 of the Insolvency Act.
In her Judgment, Justice Magala, emphasized that, under Section 2(1) and 2 of the Insolvency Act, a company is presumed to be unable to pay its debts for purposes of insolvency if it has failed to comply with a statutory demand or an execution order issued by court in favour of a creditor or if its property is in wholly or substantially in the possession of a receiver or some other person enforcing a charge over
that property.
Further, under Regulation 85 (2) (c) of the Insolvency Regulations, a petition to liquidate a company may be presented before the court where the company has agreed to make a settlement with its creditors or entered into administration.
However, the Court noted that there is a window under Section 2 (3) through which the company may be permitted to prove insolvency “by other means.”
In Fravolt Technical Services Limited‘s case however, the judge noted that no statutory demand had been served on the company, nor had the shareholders provided alternative evidence to prove the company’s indebtness let alone its inability to pay its debts.
“The Petitioner other than stating that she failed to pay the taxes owed to URA, UNBS, the Landlord and salaries; she neither proves that she failed to pay nor adduces any evidence in court to show these liabilities and failure to pay the same. This Court cannot also ignore the necessity of a statutory demand to first be issued to the Petitioner; and or any other evidence that the company had not paid its debts; and therefore be satisfied that it was unable to do so.” Justice Magala stated.
Re-echoing the decisions of Justice Musa Ssekaana in the cases of Omer Farming Company v. Rehoboth Agricultural Management Services and Mbale Resort Hotel v. Babcon (U) Limited, where it was held that parties should first ascertain liability before commencing insolvency petitions, Justice Magala highlighted that the court’s role in a winding up petition is not to serve as a forum for adjudicating disputed debts.
She referenced the case of Mann and Another vs. Goldstein and Another [1968] 1W.L.R 1091 where Justice Ungoed Thomas stated: ” But what if the debt is disputed by the company on some substantial ground but it appears that the company is unable to pay its debts?…The strongest statement which I have seen in favour of the plaintiff’s contention is that of Kekewich J. in New Travellers’ Chambers Ltd v. Cheese and Green 70 L.T. 271, 272: ‘Of course the question whether this is a debt or not may possibly be tried by a winding-up petition; but it has been said over and over again, that the presentation of a winding-up petition is not a convenient, and often not a proper method of trying a disputed debt. If there is any reasonable ground for disputing the existence of the debt-if the question is not a mere question
of quantum, but whether there is in fact a debt or not- a petition ought to be presented, and therefore the court ought to restrain the presentation of the petition.’ …But there is, in my view, a substantial defence to the whole of Mr. Goldstein’s claim and, as I have indicated, the Companies Court is not the proper court to decide the issue that thus arises.”
In Fravolt Technical Services Limited‘s case, whereas the company put its tax liability (debt) at a tune of UGX 221,079,886, URA put it at UGX 244,364, 659 and neither party adduced sufficient evidence to prove its debt amount leaving the actual debt liability of the petitioner unascertained.
“I am persuaded by the above authority to consider the Petitioner’s debt with the Uganda Revenue Authority… All that is clear, is that there is an outstanding tax liability evidence of which has not been properly presented in court by either party and the tax liability is disputed. Regarding the other debts, the Petitioner only makes mention of them but does not adduce evidence to prove the same. I am therefore of the view that the Parties cannot [determine] the liability through a winding up petition. This calls for the need for both parties to adduce evidence to fully determine the matter of controversy between them.” Justice Magala stated.
“Having established that a statutory demand was never served upon the Petitioner, that the Petitioner has not adduced any evidence to prove her inability to pay the debts and the same debts have not been proved by the Petitioner; this Court is certain that the Petitioner has not satisfied the grounds to wind up the company. The Petition is dismissed with costs to the Respondent.” She added.
Parties; Fravolt Technical Services Ltd (IN LIQUIDATION) by Shareholders Counsel: M/s Mugarura, Kwarisiima & Co. Advocates (for the petitioners) Legal Services & Board of Affairs Department (for URA)
