The High Court has blocked creditors from directly using the Insolvency Act to liquidate co-operative societies, ruling that they must first follow the winding-up process prescribed under the Co-operative Societies Act.
The ruling means creditors of financially distressed co-operatives cannot automatically turn to the Insolvency Act when a society defaults on its obligations.
Justice Rhoda Rutto made the ruling in a September 28 case that struck out a petition by Rupsa Regulated NWDT Sacco Society Limited. Rupsa was seeking to liquidate the Kenya Union of Savings and Credit Co-operatives Limited (Kuscco) under the Insolvency Act.
The decision could shape how creditors pursue unpaid debts from co-operatives, with default alone not giving creditors a direct route to liquidation.
The judge said the Co-operative Societies Act expressly excludes application of the Insolvency Act to co-operatives, subject to specific provisions that may be applied through rules made under the Act.
Rupsa, formerly known as PCEA Ruiru Sacco Society, was among 292 saccos, individuals and service providers that had filed lawsuits cumulatively seeking Sh6.48 billion from Kuscco, whose assets were valued at Sh5.4 billion.
The claims pushed saccos to vote to liquidate Kuscco and proportionately share the proceeds. However, Rupsa opposed the move as it pushed to liquidate Kuscco and recover its debt of Sh108.85 million.
The judge said Section 95 of the Co-operative Societies Act provides that, except as expressly provided by rules made under Section 91, the Companies Act, Insolvency Act, and Registration of Business Names Act do not apply to a co-operative society.
‘In my view, the language of section 95 is plain and unambiguous. Parliament expressly excluded the application of the Insolvency Act to a co-operative society, subject only to the qualification contained in the opening words concerning rules made under Section 91,’ said the judge.
The court also rejected Rupsa’s argument that Kuscco’s status as a corporate body brought it within the definition of a company under the Insolvency Act.
The judge noted that while registration under the Co-operative Societies Act gives a society corporate personality, which does not make it a company for purposes of the Insolvency Act.
‘The mere fact that the respondent (Kuscco) is a body corporate cannot bring it within the definition of a company in the Insolvency Act,’ said the judge.
‘If Parliament intended everybody corporate to fall within the definition of ‘company’, there would have been little need for the specific definition in section 2, including the express references to particular entities such as building societies and limited liability partnerships.’
The judge also dismissed the significance of the word ‘Limited’ in Kuscco’s name, saying its legal character was determined by the statute under which it was established, ‘rather than merely by the nomenclature attached to its name’.
The ruling was also based on Section 61(5) of the Co-operative Societies Act, which provides that no co-operative society shall be dissolved or wound up except by an order of the Commissioner for Co-operative Development.
The judge found the provision to be ‘categorical’, saying it vests the power to initiate dissolution and winding-up exclusively in the Commissioner and does not allow a creditor to bypass that mechanism by invoking the Insolvency Act.
The court clarified that this does not remove the High Court from the liquidation process. The first schedule to the Co-operative Societies Act gives the court powers over various aspects of liquidation after the statutory process has been triggered.
‘The High Court’s involvement is supervisory and facilitative within a liquidation process already triggered in accordance with the Co-operative Societies Act. It is not a substitute for the statutory role assigned to the Commissioner,’ the judge said.
Rupsa had argued that Kuscco was insolvent, citing its unpaid demand of Sh108.85 million and financial reports which it said showed the entity had liabilities of about Sh17.7 billion against assets of Sh5.2 billion.
However, the judge said such allegations could not create jurisdiction of the High Court under the Insolvency Act.
‘The fact that the respondent may be indebted, may have been served with a statutory demand or may otherwise satisfy the factual indicators of insolvency does not alter the statutory regime applicable to it,’ she said.