The High Court has allowed liquidation of the former owner of popular restaurant chain Java House despite opposition by Kenya Revenue Authority (KRA). The agency argued that the move was intended to escape a tax liability of Sh3.3 billion.
The court said ECP Kenya had tabled its financial statement for the year 2023 showing it had zero assets, Sh3.93 billion liabilities and massive losses, with auditors stating that the firm was no longer a going concern.
ECP Kenya is majority owned by US-based Emerging Capital Partners (ECP) and has been involved in a tax fight with KRA, part of which arose from the sale of the popular restaurant.
The court said in the ruling that KRA did not dispute the veracity or correctness of the firm’s financial statement. The court added that the evidence tabled was compelling as to the firm’s dire financial position.
KRA had suggested the company be placed under administration as an alternative to liquidation, but the court noted that administration is meant to rescue a viable business.
‘The company has not traded for over two years, has no staff, and no assets and I find that administration would be a futile expense,’ said the court.
The firm, through its director Carolyn Margaret Campbell, moved to court last year seeking voluntary liquidation, arguing that it can no longer be maintained as a going concern as there were no funds to sustain its operations.
She added that directors resolved on April 1, 2024 that it should be liquidated after a thorough evaluation of its financial standing and operational sustainability.
Ms Campbell added that the majority shareholder was also undergoing liquidation in the US.
The firm was involved in the collection of data from portfolio companies, process and collating the data to respond to various tasks assigned to it by parent company – ECP Manager LP
‘The company cannot be maintained as a going concern and there are no funds to sustain continued operations. It is therefore prudent to liquidate the company in accordance with section 425 (1) (a) of the Insolvency Act,’ she said, and asked the court to appoint the official receiver as the liquidator.
The court heard that the company had not traded since April 15, 2023, and closed its operations in the country in April 2024.
KRA had opposed the application arguing that the company did not provide proof to back up claims that it had no assets, employees, or funds, or that the US parent company is actually in liquidation.
The taxman further questioned why the company made no financial contingency for the massive tax liabilities before it decided to stop trading.
‘I have gone through the parties’ rival arguments in their pleadings and submissions and I come to the conclusion that the company has made out a credible, good-faith case that it is unable to pay its debts, and liquidation appears inevitable,’ said the court.
The court added that a company with no operations or income was enough proof that it was unable to pay debts.
The court also noted that the company had complied with the procedural requirements for a liquidation petition by filing the required forms on the Statement of its Affairs, Form 32D verifying affidavit accompanying the petition, Certificate of Compliance from the Official Receiver, and it advertised the petition in the newspaper.
‘Lastly, I note that the Company filed this petition 15 months after ceasing trade, just over two years after the tax assessments and voluntarily exposed its books to the Official Receiver. Further, no fraud has been alleged by KRA or any other creditor,’ said the court.
According to the court, all the above was a demonstration of good faith.
In 2021, KRA issued corporate tax of Sh773 million against the company but the firm objected. The appeal was dismissed by the tax appeals tribunal and a subsequent appeal to the High Court was equally rejected.
KRA issued another corporate tax on February 4, 2022, for Sh2.5 billion based on management fees received.
The firm filed an objection and an appeal before the tribunal but it was dismissed in November 2023.