The High Court in Uganda has ruled that a petitioner for liquidation of a company must issue a statutory demand regardless of the grounds of the petition.
The background
In Roofings v Roko Construction a petition was filed for winding up of the Roko Construction (“Roko”) on the grounds that a consent judgment against it remained unsatisfied. Roko contended that the law required that despite the unsatisfied judgment, it still had to be served with a statutory demand and the petitioner had not done so. Roko prayed for a dismissal of the petition as improperly before court. The petitioner argued that the issue of a statutory demand was only one of the methods under the law, of proving that a debtor was unable to pay its debts. In this case the unsatisfied judgment proved the inability to pay debts and therefore no statutory demand was necessary.
The law
The Insolvency Act, 2011 provides that a debtor is presumed to be unable to pay its debts if,
- the debtor has failed to comply with a statutory demand;
- the execution issued against the debtor in respect of a judgment has been returned unsatisfied in whole or in part, or
- all or substantially all the property of the debtors is in possession or control of a receiver or some other person enforcing a charge over that property.
The Insolvency Regulations, 2013 provide that a petition to liquidate a company may be presented to the court where the company:
- has been served with a statutory demand and is unable to comply with the demand;
- is unable to pay its debts;
- has agreed to make a settlement with its creditors or entered into administration.
There is no conjunctive or disjunctive (and/or) applied between these conditions.
The decision
The court found that the use of the semicolons at the end of each paragraph in the Regulations meant that all the conditions above were interlinked. A petitioner must therefore issue a statutory demand notwithstanding that inability to pay debts could be established in this case by way of an unsatisfied judgment. The court dismissed the winding up petition.
The significance of the decision
The decision makes unclear the grounds on which a petition to wind up a company may be brought. The court focused on the statutory demand as the first condition in the Regulations on presentation of a petition. However, the argument of the court that the use of the semicolon serves to link all the conditions would also mean that a petitioner for winding must all satisfy the third condition as well, namely that the company has agreed to make a settlement with its creditors or entered into administration.
While we agree that the drafting of the Regulations could have been better, the intention of the legislature as stated in the Insolvency Act is apparent. A company may be wound up for inability to pay its debts. This inability may be proved in any of three ways including failure to honour a statutory demand or an unsatisfied judgment. A judgment creditor would not need to start again, so to speak, by issuing a statutory demand.
It will be costly to the insolvency practice in Uganda to wait for this decision to be overturned on appeal. The fastest resolution would be by an amendment of the Regulations to clarify that the grounds for presentation of a petition are disjunctive. Just the small word ‘or’. It should set a record for the smallest amendment ever.
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