Maria K. Mutesi Vs Official Reciever (in Bankruptcy)

THE REPUBLIC OF UGANDA

THE HIGH COURT OF UGANDA AT KAMPALA

(COMMERCIAL DIVISION)

MISCELLANEOUS APPLICATION NUMBER 706 OF 2011

(ARISING OUT OF BANKRUPTCY PETITION NUMBER 5 OF 2011)

MARIA K. MUTESI).............................................. APPLICANT (DEBTOR)

VERSUS

OFFICIAL RECEIVER (IN BANKRUPTCY)................................ RESPONDENT

BEFORE HON. JUSTICE CHRISTOPHER MADRAMA

RULING

This Notice of Motion is was filed under sections 98, 40 (4) Of The Civil Procedure Act, order 52 rules 2 and 3 and order 50 rules 3 of the Civil Procedure Rules, section 10 of the Bankruptcy Act cap 67 and sections 43 (2) and 43 (3) (b) of the Civil Procedure Act for:

1. An order is issued staying any action, execution or other legal process against the Applicant/Debtor pending the final disposal of Bankruptcy Petition No. 5 of 2011.
2. An order to be issued to release the judgment debtor from Civil Prison Luzira pending the final disposal of Bankruptcy Petition No. 5 of 2011.
3. An order prohibiting any further arrests in relation to the judgment debtor's debt and for
4. Costs of the application to be provided for.

The grounds of the application are that the applicant has shown an intention to apply for and has applied/fixed Bankruptcy Petition No. 5 of 2011; that the applicant is currently in Civil Prison Luzira in respect of various debts; the applicant has no properties and is unemployed; if the order is not issued the applicant will suffer irreparable damage which cannot be compensated for by way of damages and it is necessary for the interests of justice that an interim order is issued to maintain the status quo between the applicant and the respondent pending the determination of the petition.

In support of the application the applicant Maria K Mutesi’s sworn affidavit dated 30^th of November 2011 repeats the grounds of the motion. It discloses that the applicant paid the requisite fees to the Official Receiver as required by law. She further avers on the basis of information from counsel that the bankruptcy petition could not be fixed in the short run as the year is coming to an end and court vacation is due. The applicant is currently in Luzira prison pursuant to warrant of arrest and committal. That she has indicated her inability to pay and does not have any property for the execution aforementioned or any monies in that regard. That she will not in any way abscond and undertakes to appear in any proceedings upon application or upon the decree in execution. That is just and fair and in the interest of justice that she is released from Luzira Civil Prison pending the hearing of Bankruptcy Petition No. 5 of 2011.

The bankruptcy petition is attached as annexure "A" to the affidavit in support of the application. Significant facts pleaded therein shows that the applicant is a judgment debtor in Civil Suit No 814 of 2011 at Mengo Chief Magistrate's Court between Mushana Julius vs. Maria K Mutesi where the applicant owes Uganda shillings 7,216,000/= as taxed costs and Uganda shillings 36,760,000/=, the decreed amount. The petitioner tried to negotiate with the judgment creditor and his lawyers for time to pay but failed to reach an agreement. She is unable to pay the judgment debts as required by a warrant issued by the court for execution. She avers that she does not have any single cent at the time of the application because her business has gone down and she is unable to pay a single cent. She was arrested on 23 November 2011 in Kabalagala from where she was transferred to the High Court at Kampala before the registrar in charge of execution for her inability to pay the judgment debt. The applicant was committed to prison on the 23^rd of November 2011 for inability to pay. She declares that she is unable to pay debts and to satisfy her creditors’ claims arising out of the aforesaid debts and therefore has presented a bankruptcy petition for a receiving order and or discharge order to be granted against her estate if any. The petition shows that she filed a statement of affairs and paid the necessary fees therein.

The statement of affairs attached to the affidavit in support of the petition shows that the applicant is indebted as follows:

1. Mushana Julius Uganda Shillings 7,216,000/= as costs and Shillings 36,760,000/= being the decreed amount.

1. Richard Byamugisha Uganda Shillings 11,000,000/=

1. Pesa Micro Finance Ltd Uganda Shillings 150,000,000/=

1. Okot George Uganda Shillings 26,600,000/=

As far as assets are concerned, the statement shows that she has no assets or property from which money can be realised.

At the hearing Counsel John Toa of Messrs Alaka and Company Advocates appeared for the applicant who had been produced in court pursuant to a production warrant issued by court on the 15^th of December 2011. The respondent was represented by State Attorney Darius Ruta from the Attorney Generals Chambers who appeared for the Official Receiver.

Counsel for the Official Receiver objected to the OR being made a party to the proceedings and Toa John, the applicant’s counsel conceded to the application to strike out the Official Receiver where upon the Official Receiver was struck off as a respondent and the suit proceeded ex parte.

The applicants Counsel Mr. John Toa cited the law under which the application was brought as summarised above, the grounds in the notice of motion and the affidavit in support. He primarily relied on section 10 of the Bankruptcy Act cap 67 for orders:

1. Staying any action, execution, or other legal process against the applicant pending final disposal of Bankruptcy petition 5 of 2011
2. To release the judgment debtor from civil prison pending disposal of the above petition,
3. Prohibiting any further arrest in relations to the judgment debtor’s debts and for costs.

He submitted that the section empowers the court at any time after presentation of the bankruptcy petition, to stay any action, execution or other legal process against the property or person of the debtor in any court in which the proceedings are pending, upon proof of the filing of a bankruptcy petition presented by or against a debtor and that the court may either stay the proceedings or allow them to continue on such terms as it may think just.

He reiterated the grounds in the motion that the applicant filed Bankruptcy Petition No. 5 of 2011 in this court. The applicant paid the requisite fees as required by law and the receipt of payment is acknowledged. The petition is not yet fixed for hearing. The applicant is currently held in Luzira Civil Prison via a warrant of arrest and committal issued by the Chief Magistrates Court of Mengo. The applicant shall not abscond and undertakes to appear in any proceeding upon application or decree in execution. He submitted that the court may impose any terms that shall compel the applicant to appear whenever needed. For that reason the applicant shall provide sureties who shall then ensure her presence in court at a time when the bankruptcy petition is being heard. He further submitted that it is in the interest of justice and prayed that this court be pleased to release the accused pending the hearing of the Bankruptcy petition. The applicant shall abide by any terms pending the hearing of the application to secure her appearance.

Counsel submitted that powers of release were stated in the matter of a petition for a receiving order by Thomas I Kato Bankruptcy Petition No. 13 of 2002 unreported before Justice James Ogoola. His Lordship held that section 11 of the Bankruptcy Act (section 10 Revised Edition) gives the court discretion to stay proceedings against the debtor. The petition needs as a minimum to give reasons for the exercise of that discretion. He prayed that the court exercises discretion and grants the orders prayed for by the applicant. And further grant any orders as it may think just.

On a question put by court as to whether the applicant has any security for due performance, counsel further submitted that the applicant has nothing at the moment as security to secure her release and as averred in the affidavit in support of the application.

In light of the urgency of such an application for release of a person from detention on the 21^st for December 2011 and in light of the pending Christmas holiday I stood this ruling over till afternoon.

I have carefully considered the submissions of the applicants counsel and the implications of this application in light of the practice direction that has centralised execution proceedings in the execution division of the High Court. The application has implications on which court should hear matters arising from execution and in fact whether this application arises from an execution proceeding. Consequently the first issue for determination is preliminary in that I have to determine whether this court is the appropriate court with jurisdiction to entertain this application. It should be noted that the applicant’s application is filed under sections, 40 (4), 43 (2), 43 (3) (b) and 98 of the Civil Procedure Act. It also sites section 10 of the Bankruptcy Act cap 67. Sections 40 – 43 of the Civil Procedure Act deal with arrest, detention, payment and release in execution proceedings. The Civil Procedure Act and the Bankruptcy Act deal with different processes. I will start with an analysis of the provisions of the Civil Procedure Act cited in support of the application.

In this case the applicant was committed by the execution division of the High Court to enforce a decree of the Chief Magistrates Court of Mengo in Civil Suit No. 814 of 2011, between Mushana Julius vs. Maria K Mutesi. The order of the court was for costs of Shs 7,216,000/= and a decreed sum of Shs 36,760,000/=. The warrant of arrest attached is dated 30^th of May 2011. Powers of a court executing decrees are clearly spelt out in the Civil Procedure Act and it suffices to summarise them for purposes of this ruling.

Preliminarily there are two matters to be considered. Firstly is the question of which court should exercise jurisdiction in this matter and secondly and without prejudice to questions of jurisdiction or appropriate forum whether the application for an interim order of release from prison is competent in the circumstances of the case.

Under section 30 of the Civil Procedure Act a decree may be executed either by the court which passed it or by the court to which it is sent for execution. In this case the decree was sent for execution by Mengo Magistrates Court to a special division of the High Court created for purposes of execution of court decrees. Section 33 (1) of the CPA provides that a court executing a decree sent to it shall have the same powers in executing the decree as if it had been passed by itself. This means that the Registrar of the High Court exercises the powers of the Chief Magistrates Court of Mengo which passed the decree and sent the same for execution to the High Court. Section 33 (2) of the Civil Procedure Act further gives the court to which a decree has been sent for execution powers to punish any person disobeying or obstructing the execution of the decree in the same manner as if it had passed the decree and its order in executing the decree shall be subject to the same rules in respect of appeal as if the decree had been passed by itself. In others words the Registrars orders in execution are subject to appeal to the High Court which is the appellate court for Chief Magistrate Courts in civil matters.

Last but not least is the question of which court can determine questions arising from execution of a decree? It is quite clear and not controversial at all that all questions relating to the execution, discharge and satisfaction of a decree are determined by the court executing the decree. This is in terms of section 34 of the Civil Procedure Act which provides:

“Questions to be determined by court executing the decree.

34. Questions to be determined by the court executing the decree.

(1) All questions arising between the parties to the suit in which the decree was passed, or their representatives, and relating to the execution, discharge, or satisfaction of the decree, shall be determined by the court executing the decree and not by a separate suit.

(2) The court may, subject to any objection as to limitation or jurisdiction, treat a proceeding under this section as a suit, or a suit as a proceeding, and may, if necessary, order payment of any additional court fees....”

In conclusion a decree is executed by the court which passed the decree or the court to which the decree is sent for execution. The court executing the decree exercises all the powers of the court which passed the decree and may determine all questions relating to the execution, discharge, or satisfaction of the decree. As far as this procedure is concerned the creditor on whose behalf the judgment debtor has been committed to prison is not a party to this application and this presents a serious challenge to the cause of justice and violates the right of the judgment creditor to be heard on the question of the release of the judgment debtor from Civil Prison. I will further return to this point when considering the provisions of the Bankruptcy Act and its effect on preference of creditors.

There are several modes of execution of decrees provided for under section 38 of the Civil Procedure Act which provides that:

“38. Powers of court to enforce execution.

Subject to such conditions and limitations as may be prescribed, the court may, on the application of the decree holder, order execution of the decree—

(a) by delivery of any property specifically decreed;

(b) by attachment and sale, or by sale without attachment, of any property;

(c) by attachment of debts;

(d) by arrest and detention in prison of any person;

(e) by appointing a receiver; or

(f) in such other manner as the nature of the relief granted may require.”

To comment briefly about this section, arrest and detention in prison of any person is one of the modes of execution of an order of the court. In addition the judgment creditor may opt to apply for the appointment of a receiver of the judgment debtors property under section 38 (e) of the CPA.

“Mulla in the Code of Civil Procedure 17^th Ed. Vol 1” by S.K Sarvaria and Snigdha Sarvaria, page 791, discusses the Indian section 51, (in pari materia with the Ugandan S.38 of the Civil Procedure Act Cap 71) which provides: “Subject to such conditions and limitations as the case may be prescribed, the court may, on the application of the decree-holder order execution of the decree-

(c) by arrest and detention for such period not exceeding the period specified in S. 58, where arrest and detention is permissible under that section.”

At page 795, the learned authors note that clause (c) of S. 51 of the Indian Code of Civil Procedure (equivalent of S. 38(c)) provides that one of the modes of the execution of a decree is ‘arrest and detention’ of the judgment debtor in civil prison. The proviso to this section restricts the power of the executing court to direct the arrest and detention of the judgment debtor to cases of execution of a decree for payment of money. The object of the proviso is to afford protection to indigent and honest debtors. Mere non payment of the amount stated in the decree is not sufficient to send the judgment-debtor to prison. But if the conduct of the judgment-debtor is dishonest or contumacious he is liable to be arrested and detained. The judgment debtor is not protected if there is element of bad faith in his conduct. If he has the means to pay and still refuses or neglects to honour his obligation under the decree, he becomes liable to imprisonment. In short, honest judgment-debtors must be protected and dishonest ones should be punished.

In this case though the order of the committal and proceedings of the Registrar Execution Department are not attached, the arrest and detention of the applicant is averred as a fact by the applicant in paragraphs 10 and 11 of the petition attached as annexure “A” to the affidavit in support of the application. Section 40 (1) of the Civil Procedure Act provides that a judgment debtor “may be arrested in execution of a decree at any hour and on any day, and shall as soon as practicable be brought before the court, and his or her detention may be in any prison of the district in which the court ordering the detention is situate...”

Where the order is for payment of money and the judgment debtor pays the amount of the decree and costs of the arrest to the officer arresting him or her, the officer shall at once release him or her. Under section 40 (3) the executing court before whom the judgment debtor appears is required to inform him or her that he or she may apply to be declared an insolvent under the law of insolvency provided he or she has not committed an act of bad faith regarding the subject of the application. The question then would be in which court the judgment debtor would apply for declaration of insolvency. Section 40 (4) is the section quoted in the applicants application. 

Section 40 (4) Civil Procedure Act provides as follows:

“(4) Where a judgment debtor expresses an intention to apply to be declared an insolvent and furnishes security, to the satisfaction of the court, that he or she will within one month so apply, and that he or she will appear, when called upon, in any proceeding upon the application or upon the decree in execution of which he or she was arrested, the court shall release the judgment debtor from arrest, and, if he or she fails so to apply and to appear, the court may either direct the security to be realised or commit the judgment debtor to prison in execution of the decree.

What is critical in section 40 (4) as far as the appropriate forum is concerned is the fact that the court may release the judgment debtor from arrest upon application for declaration of insolvency and furnishing of security for due performance or appearance. Section 42 of the Civil Procedure Act deals with release from detention and we do not need to consider that for the moment other than the fact that detention may not exceed six months. Section 43 deals with release on the ground of ill health or of a contagious disease. The procedures for arrest, detention, examination and release of a judgment debtor are under order 22 rules 34 – 38 of the Civil Procedure Rules.

Mulla (supra) further discusses the application of section 55 of the Indian Code (equivalent of S. 40 of the CPA), and notes that there have been changes in this section by providing for the conditions which appear in the Ugandan Civil Procedure Act under paragraphs (a) to (d). The author discusses subsection 3 and 4 of the section which provides for the insolvency of the judgment debtor after an order for arrest. According to subsection 3,

“Where a judgment debtor is arrested in execution of a decree for the payment of money and brought before the court, the court shall inform the judgement debtor that he or she may apply to be declared an insolvent, and that he or she will be discharged if he [may be discharged] if he has not committed any act of bad faith regarding the subject of the application and if he or she complies with the law of insolvency for the time being in force.”

Mulla (supra) notes that if a judgment debtor against whom an order for arrest has been made, is adjudicated, insolvent, without a protection order, the adjudication does not prevent his arrest, and the court of execution must require the judgment debtor to give security under the latter part of subsection 4 that he will appear when called upon in any proceedings in insolvency or upon the decree in execution of which he was arrested.

Subsection 4 provides that,

“Where a judgment debtor expresses an intention to apply to be declared an insolvent and furnishes security, to the satisfaction of the court, that he will within one month so apply, and that he will appear, when called upon, in any proceeding upon the application or upon the decree in execution of which he was arrested, the court [may release] him from arrest, and, if he fails so to apply and to appear, the court may either direct the security to be realized or commit the judgment debtor to prison in execution of the decree.”

Mulla notes that this expression of intention is equivalent to a statement made to the judgment creditor by the judgment debtor of an intention to suspend payment of his or her debts. It is therefore an act of bankruptcy as defined in S. 9 of the Presidency Towns Insolvency Act 1902 of India.

Mulla further notes that the court has power to extend the period of one month for applying for adjudication. The intention expressed in this section is to be declared insolvent and not to be declared at the end of the month provided nothing does turn up. Furthermore, that where the bond is passed in terms of that section, that is where a surety undertakes;

1. that the judgment debtor will within one month apply to be declared insolvent, and

1. will appear when called upon, in any proceedings upon the application or upon the decree in execution of which he was arrested, the security will be realized when there is failure to comply with either condition. The surety, however, is not released by the mere filing by the judgment debtor of the petition in insolvency; the security continues until a final order is made on the petition.

In this case the judgment debtor has no security to give to assure her attendance in court. Secondly this matter under the Civil Procedure Act ought to have been brought before the court executing the decree or the court to which the decree has been sent for execution. This is the Registrar of the Execution department who committed the applicant to Civil Prison. Last but not least the judgment creditor should be given a chance to be heard in the application.  Having said that, I would find as far as section 40 – 43 of the Civil Procedure Act is concerned that this application cannot be granted.

Counsel submitted that this application is primarily brought under section 10 of the Bankruptcy Act. Bankruptcy is an independent and separate procedure and may be considered on its merits. In this procedure the applicant seeks stay of proceedings. Under section 95 of the Bankruptcy Act Cap 67 the High Court has jurisdiction in Bankruptcy matters. It provides:

“Jurisdiction in bankruptcy

The court having jurisdiction in bankruptcy shall be the High Court, but the Chief Justice may by statutory order delegate all or any part of the jurisdiction of the High Court in bankruptcy to any magistrate’s court, either generally or for the purpose of any particular case or class of cases.”

The term “court” is defined under S. 1 (d) of the Bankruptcy Act to mean the court having jurisdiction in bankruptcy under the Act. The Constitution (Commercial Court) (Practice) Directions 1996 rule 4 (1) provides for the Jurisdiction of the Commercial Court. Initially this did not include bankruptcy and company causes. However Administrative Circular No. 2 of 2004 on deployment of High Court Judicial Staff added company causes, bankruptcies and intellectual property as businesses to be handled by the commercial court and it may be property asserted that the Commercial Court Division may hear the petition of the applicant and that it was filed in the appropriate court.

A bankruptcy petition is primarily an action for a receiving order of the estate of the debtor. Section 4 of the Bankruptcy Act provides that: “...if a debtor commits an act of bankruptcy, the court may, on a bankruptcy petition being presented either by a creditor or by the debtor, make an order, in this Act called a receiving order, for the protection of the estate.” It follows that a bankruptcy petition brings about a competition for the estate of the debtor between the court official charged with execution and the Official Receiver or Trustee in Bankruptcy. Whereas the judgment creditor is a creditor, he does not take priority over other creditors and the official receiver upon appointment would be the proper person to receive all the assets of the bankrupt.The cases of Marley Tile Co Ltd v Burrows and another [1978] 1 All ER 657; Re Andrew, Official Receiver, v Standard Range and Foundry Co Ltd [1936] 3 All ER 450; and Re Barrell Enterprises and others [1972] 3 All ER 631 all bring out an important principle that the Court Bailiff is obliged to hand over the property of the bankrupt to the Official Receiver or trustee in Bankruptcy upon a receiving order being made of the debtors estate. This emphasises the doctrine of relation back of the vesting of the property in the receiver from the time of the act of bankruptcy. It also ensures that the judgment creditor does not have any preference over other creditors.

I have also considered section 10 of the Bankruptcy Act which provides that:

“10. Power to stay pending proceedings

(1) The court may, at any time after the presentation of a bankruptcy petition, stay any action, execution or other legal process against the property or person of the debtor; and any court in which proceedings are pending against a debtor may, on proof that a bankruptcy petition has been presented by or against the debtor, either stay the proceedings or allow them to continue on such terms as it may think just.

(2) Where the court makes an order staying any action or proceedings, or staying proceedings generally, the order may be served by sending a copy of it, under the seal of the court, by post to the address for service of the plaintiff or other party prosecuting the proceedings.”

The court has power to stay legal process against the property or person of the debtor upon proof of presentation of a Bankruptcy petition. Such order may be served on the plaintiff or other party prosecuting the proceedings.

The filing of a bankruptcy petition is an act of bankruptcy under section 2 (1) (f) of the Bankruptcy Act cap 67 Laws of Uganda. This section provides that the act of a court declaration of inability to pay his or her debts or the presentation of a bankruptcy petition as in this case constitutes an act of bankruptcy.

The key issue or matter behind the wording of section 4 of the Bankruptcy Act for a receiving order of the court is the protection of the estate of the debtor. The intention of the judgment creditor who caused the applicant to be committed to prison may be to make her serve a jail sentence in lieu of recovery of the debt or to recover the decreed money from the applicant. On the other hand whatever the motivation of the applicant in this application, the most difficult aspect of the application is that the applicant avers that she has no property whatsoever and cannot furnish any security for the performance of any decree. I cannot at this state prejudge the bankruptcy petition but I may pose the question. What is the purpose of a bankruptcy petition for the appointment of the Official Receiver if there is no property to be vested in the Official Receiver? The petition attached to the application, if taken on its face value, discloses that the applicant is not only insolvent but has no property for the satisfaction of any creditors to whom she owes money as averred in the application.

Last but not least I have considered the case of A Petition for a Receiving Order by Thomas I. Katto Bankruptcy Petition No. 13 of 2002 decided by Hon. Justice James Ogoola PJ as he then was. In that case the court considered the petition and not an application for stay of execution per se pending the hearing of the petition. In that case the court noted that an applicant has to give reasons for stay of execution or proceedings. The court was not satisfied that sufficient particulars of any proceedings had been given and disallowed the prayer under section 11 (revised section 10) of the Bankruptcy Act. The court however noted that section 11 gives the High Court discretionary power whether to grant an order for stay of execution or stay of proceeding.

Taking into account all the factors and law discussed above and particularly the fact that in principle the Official Receiver has priority in receiving the assets or estate of the applicant as opposed to a court official in execution, the execution proceedings in Civil Suit No. 814 of 2011 between Mushana Julius and Maria K Mutesi at the Chief Magistrates Court Mengo which proceedings are being conducted by the execution department of the High Court to which the decree has presumably been sent for execution are stayed pending the hearing of the applicants Bankruptcy Petition. The point is that whatever the case the grant of the petition when it is heard would vest any property which belongs to the subject of inquiry in the execution and bankruptcy petition in the official receiver.  As I have observed above there are other creditors who may wish to participate in the proceedings, even if to further imprison the applicant. These creditors are mentioned in the statement of affairs by the petitioner and are:

1. Richard Byamugisha to whom the applicant owes shillings 11,000,000/=

1. M- Pesa Micro Finance Ltd to whom the applicant owes shillings 150,000,000/=

1. Mr. Okot George to whom the applicant owes Shillings 29,600,000/=

Because the petitioner avers that she has no money or assets, I will not make any order for payment of money or deposit of security in the suit under which she was committed to Civil Prison. The petitioner’s petition for bankruptcy will be heard on merits as to inter alia whether this court has discretion to grant her petition on the basis of an averment that she is impecunious. Notwithstanding it is a matter of legal doctrine that the proceedings in bankruptcy should in the circumstances take priority for purposes of avoiding preference of the judgment creditors over other creditors and are to be preferred over execution proceedings.

To avoid the applicant’s application being used as an abuse of the process of court and without losing sight of the powers of an executing court under section 40 (4) of the Civil Procedure Act, I must note that the applicant has satisfied the requirements therein for an intention and in fact has applied for declaration of insolvency. Exercising my discretion in this matter the applicant will be released from Civil Prison on the following terms:

1. Any monies paid for her subsistence in the Civil Prison will be refunded by her to the judgment creditor pending further orders of court in lawful proceedings.  

1. The applicant is bound to report to the Execution Department once every two weeks for her appearance before the Registrar execution who will note her presence and compliance with this order. Failure to comply with the requirement to report every fortnight will lead to her re arrest and imprisonment for the judgment debt without prejudice to the bankruptcy petition and other creditors.

1. The applicant will appear for hearing of the bankruptcy petition in person each time it is heard

1. This judgment shall be served on the Judgment creditor in Mengo Chief Magistrates Civil Suit No. 814 of 2011 and the committal Registrar of the execution department of the High Court.

Ruling delivered in court this 21^st day of December 2011

Hon. Mr. Justice Christopher Madrama

Ruling delivered in the presence of:

Bundu Richard holding brief for John Toa for the applicant

Applicant in court

Patricia Akanyo Court recording assistant

Ojambo Makoha Court Clerk

Hon. Mr. Justice Christopher Madrama

21^st December 2011