Background

In 2012, Kwale Sugar contracted Epco Builders (Epco) to construct a sugar factory under a KES 2.22 billion Engineering, Procurement and Construction (EPC) agreement. A dispute arose over alleged non-payment of KES 712 million. Epco issued a statutory demand and subsequently filed an insolvency petition seeking liquidation of Kwale Sugar. Kwale Sugar applied to set aside the demand and strike out the petition, arguing that:

• the debt was genuinely disputed;
• the parties were bound by an arbitration clause; and
• the demand was defective under the Insolvency Regulations.

The High Court dismissed the application. On appeal, the Court of Appeal upheld the outcome but clarified important legal principles at the intersection of insolvency law and construction contracts.

Key findings by the Court of Appeal

Procedural errors will not defeat jurisdiction

Kwale Sugar had cited personal bankruptcy provisions instead of the corporate insolvency rules. The court found this error non-fatal, confirming that courts will prioritise substance over form in the absence of prejudice.

Disputed debts require proper determination

The Court of Appeal criticised the High Court’s remarks that the debt was undisputed, noting that such conclusions should be reserved for full hearings or arbitration. Courts should be cautious not to prejudge contested issues during interlocutory proceedings.

Arbitration clauses do not bar insolvency petitions

While acknowledging the existence of the arbitration clause, the court held that it does not oust the jurisdiction of insolvency courts. Insolvency proceedings are collective in nature and serve a public interest function that may override private dispute resolution arrangements.

Technical defects in demands are not fatal

The court held that defects in the statutory demand, such as form irregularities, will not invalidate it unless actual prejudice is demonstrated. In this case, no prejudice was shown.

Implications for construction stakeholders

For contractors

For contractors, certificates are persuasive but not talismanic. Their legal effect depends on the contract’s terms, and they will not cure fundamental issues of non-compliance, missing support or unresolved set-offs.

Insolvency should be reserved for clear cases of non-payment, not deployed as leverage in a live valuation dispute.

For employers and developers

The message to debtors is equally clear: a technical objection is strongest when coupled with a coherent evidentiary record showing why the sum claimed is not presently due under the contract.

The consequences are practical. For employers, an arbitration clause is valuable only if it is invoked promptly and carried on the back of documentary substance, such as engineer or architect determinations, measurement records, variation orders, defect notices, correspondence evidencing reconciliation and a credible set-off schedule. Paying the undisputed slice protects credibility and undercuts any narrative of inability to pay, while reserving genuine disputes for the agreed dispute-resolution forum. For more on what constitutes a genuine dispute, see our previous alert here.

For all parties

For project owners, contractors and funders, the case reinforces the value of disciplined paperwork: interim payment certificates (IPC) packs tied to contract mechanisms, site diaries, measurement sheets, variation order (VO) approvals, notices and reconciliations. In a payment standoff, those records, rather than the insolvency court, will decide who ultimately pays whom, and how much.

Key takeaways

• Debt disputes must be resolved on merits, not prematurely at interlocutory stages.
• Arbitration does not override insolvency jurisdiction, especially where the debt is not genuinely contested.
• Genuine disputes on substantial grounds must be resolved through appropriate forums like arbitration or full trial.
• Form defects in statutory demands will not invalidate proceedings unless actual harm is proven.

Conclusion

The Kwale Sugar decision reinforces the principle that insolvency proceedings must be reserved for clear cases of inability to pay and cannot be used as leverage in unsettled construction disputes.

It also clarifies the boundaries between private dispute resolution mechanisms and public insolvency processes. Where debts are genuinely disputed on substantial grounds, the appropriate forum remains the agreed dispute resolution mechanisms, not the insolvency court.