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The Ugandan High Court has ruled that a petitioner in liquidation of a company must make a legal demand regardless of the grounds for the petition.
In Roofs v Roko Construction a petition has been filed for the liquidation of Roko Construction (“Roko”) On the grounds that a consent judgment against him remained unsatisfied. Roko argued that the law required that despite the unsatisfied judgment, he still had to be served with a legal demand and the petitioner had not done so. Roko prayed for the petition to be dismissed as being improperly in court. The claimant argued that issuing a legal demand was only one of the methods provided by law to prove that a debtor was unable to pay his debts. In this case, the unsatisfied judgment proved the inability to pay the debts and, therefore, no legal demand was necessary.
The Insolvency Law of 2011 provides that a debtor is presumed incapable of paying his debts if,
- the debtor has not complied with a legal request;
- the execution against the debtor in respect of a judgment has been rendered unsatisfied in whole or in part; Where
- all or substantially all of the debtors’ property is in the possession or control of a receiver or other person charged with enforcing a charge on such property.
The Insolvency Regulations 2013 provide that an application for liquidation of a business can be made to the court when the business:
- has been served with a legal request and is unable to comply with the request;
- is unable to pay debts;
- has agreed to settle with his creditors or set up an administration.
There is no connective or disjunctive (and / or) applied between these conditions.
The court held that the use of semicolons at the end of each paragraph of the Rules meant that all of the above conditions were linked. A petitioner must therefore make a legal request even if the inability to pay debts could be established in this case by an unsatisfied judgment. The court rejected the request for liquidation.
the importance of the decision
The decision does not specify the grounds for which an application for the liquidation of a company can be brought. The court focused on the legal claim as the first condition of the Rules on bringing an application. However, the court’s argument that the use of the semicolon serves to bind all the conditions would also mean that a liquidation claimant must also meet the third condition, namely that the company has agreed to enter into a settlement with its creditors or entered the administration.
While we agree that the drafting of the Regulations could have been better, the intention of Parliament as stated in the Insolvency Act is evident. A company can be put into liquidation for inability to pay its debts. This inability can be proven in one of the following three ways, including failure to honor a legal demand. Where an unsatisfied judgment. A judgment creditor would not need to start over, so to speak, by making a legal claim.
It will be costly for the insolvency practice in Uganda to wait until this decision is overturned on appeal. The quickest resolution would be to amend the Standing Orders to make it clear that the reasons for presenting a petition are disjunctive. Just the little word ‘or’. It should set a record for the smallest amendment ever.