Part I – Insolvency’s Shadow over Arbitration — KISCOL v Epco Builders
Part I: The Anatomy of a High-Stakes Construction Dispute
1.1. The Foundation of the Conflict: The EPC Contract
The dispute between Kwale International Sugar Company Limited (KISCOL) and Epco Builders Limited (Epco) originated from a significant and complex undertaking. In 2012, the two parties entered into an Engineering, Procurement, and Construction (EPC) agreement valued at KES 2.22 billion for the construction of a new sugar factory in Kwale, Kenya. EPC contracts of this scale are inherently high-risk, involving substantial capital investment and intricate project management over an extended period.
The contractual framework established a formal process for managing payments and potential disputes, appointing Adventist Inhouse Africa as the project manager. In large-scale construction projects, the project manager or engineer plays a pivotal role, acting as a quasi-adjudicator responsible for assessing the quality and quantity of work completed, certifying interim payment applications, and making initial determinations on claims for variations or extensions of time. This structure was designed to provide a clear, contractually agreed-upon mechanism for resolving issues as they arose. However, the subsequent breakdown of this process and the escalation of the conflict into the judicial system underscore the immense pressure that payment disputes can exert on even well-defined contractual relationships.
1.2. The Genesis of the Debt: From Disputed Invoices to Statutory Demand
The relationship between KISCOL and Epco deteriorated when a significant payment dispute emerged. Epco alleged non-payment for works performed, with the claimed amount varying considerably across different legal filings and reports. The figures cited include KES 712 million, KES 652 million, and KES 405.8 million. This inconsistency is not merely a clerical discrepancy; it points to the very heart of the legal conflict. The higher figures likely represent Epco’s total claim, encompassing base contract sums, alleged variations, and claims for loss and expenses, while the lower figure may reflect amounts that were certified by the project manager but remained contested by KISCOL on grounds of non-performance or other contractual breaches.
Early court filings indicate that the disagreement stemmed from what KISCOL termed “unsubstantiated claim for additional payment, losses and expenses” by Epco. The project manager, upon assessment, reportedly found some of these claims to be inadmissible and others to require further substantiation. This context is critical, as it frames the matter not as a simple refusal to pay a settled debt, but as a classic construction valuation dispute. Such disputes—covering the assessment of work done, contractual entitlements, and potential counter-claims for delays or defects—are fundamentally different from an undisputed, liquidated debt.
Faced with this impasse, Epco deployed a powerful and aggressive legal strategy. It issued a statutory demand under Kenya’s Insolvency Act and, upon its expiry without payment, proceeded to file an insolvency petition (Milimani Insolvency Petition No. 007 of 2019) seeking the liquidation of KISCOL. This maneuver transformed a commercial dispute into an existential threat to KISCOL, leveraging the severe consequences of insolvency proceedings to compel payment. This strategic choice set the stage for a landmark legal battle over the appropriate use of insolvency law as a tool for debt collection in the context of genuinely disputed claims governed by an arbitration agreement.
2.1. The High Court’s Initial Determination: A Controversial Threshold
In response to Epco’s insolvency petition, KISCOL launched a defensive application in the High Court. The application sought to set aside the statutory demand and strike out the entire petition on three primary grounds: first, that the underlying debt was subject to a genuine and substantial dispute; second, that the EPC contract contained a binding arbitration clause that was the contractually mandated forum for resolving such disputes; and third, that the statutory demand itself was procedurally defective.1
The High Court dismissed KISCOL’s application. Critically, the court’s reasoning was founded on its determination that there was “no substantial dispute” over the debt.4 This finding was highly consequential. By ruling that the dispute was not substantial enough to halt the insolvency process, the High Court effectively made a summary determination on the merits of a complex, multi-million-shilling construction claim at an interlocutory stage. This decision set a controversially high threshold for a debtor seeking to shield itself from liquidation proceedings, suggesting that even the presence of an arbitration clause and contested valuations might not be enough to prevent a creditor from using the insolvency process. The ruling emboldened creditors and signaled that the courts might be willing to look past contractual dispute resolution mechanisms in favor of the summary procedures of insolvency law.
2.2. The Court of Appeal’s Landmark Judgment (Civil Appeal 208 of 2020): A Nuanced Re-calibration
KISCOL appealed the High Court’s decision, leading to the landmark judgment of the Court of Appeal delivered on 7 February 2025.1 The appellate court ultimately upheld the High Court’s dismissal of KISCOL’s application, thereby allowing the insolvency proceedings to continue. However, it did so on a completely different and far more nuanced legal basis, clarifying several crucial principles at the intersection of insolvency, contract, and arbitration law.
2.2.1. Reconciling Arbitration Clauses and Insolvency Petitions
The Court of Appeal directly addressed KISCOL’s argument that the binding arbitration clause in the EPC contract should have precluded the insolvency petition. The court held unequivocally that a private arbitration agreement does not oust the statutory jurisdiction of an insolvency court.1 Insolvency is a collective, public-interest process for the benefit of all creditors—so it can proceed even where private dispute mechanisms exist.
2.2.2. The “Genuine Dispute” Threshold
Departing from the lower court’s reasoning, the Court of Appeal criticized the High Court’s finding that the debt was undisputed. Definitive conclusions on contested debts belong in a full evidentiary hearing or before the arbitral tribunal, not at a preliminary stage.1 The court bifurcated the inquiry: (i) whether the insolvency court may examine overall solvency (yes), and (ii) the merits/quantum of Epco’s specific claim (to be resolved in arbitration or trial). A disputed debt does not automatically strip the insolvency court of jurisdiction to assess solvency.
2.2.3. Procedural Defects and the Prejudice Test
KISCOL argued that the statutory demand was invalid because it cited bankruptcy provisions instead of corporate insolvency. The Court of Appeal deemed the error non-fatal—substance over form—unless actual prejudice is shown.1 Here, KISCOL clearly understood the demand and suffered no prejudice.12
2.2.4. The Evidentiary Value of Payment Certificates
Interim payment certificates (IPCs) are “persuasive but not talismanic”.1 They are strong evidence of a debt but not conclusive. Contract terms govern their effect; certificates cannot cure fundamental defects (spec non-compliance, missing support, or valid set-offs/counter-claims).
2.3. The Final Appeal: The Supreme Court’s Jurisdictional Boundary
After losing in the Court of Appeal, KISCOL sought conservatory orders in the Supreme Court (SC Petition (Applic) No. E007 of 2025).4 The Supreme Court dismissed the application on jurisdictional grounds: it could not micromanage ongoing High Court insolvency proceedings, and its appellate role is limited to reviewing final Court of Appeal decisions.4 Practically, KISCOL was sent back to the High Court to defend itself on the merits within the insolvency cause.
Part III: The Broader Context — A Company Under Siege
3.1. A Pattern of Insolvency and Creditor Action
The petition filed by Epco was not an isolated event. Court filings from other matters reveal that KISCOL was facing multiple insolvency petitions from various creditors. Specifically, in addition to Milimani Insolvency Petition No. 007 of 2019 initiated by Epco, the company was also defending High Court Insolvency Cause No. E020 of 2021. The existence of several concurrent insolvency actions from different creditors paints a compelling picture of systemic financial instability. It shifts the narrative from that of a single, contentious commercial dispute with one contractor to a broader pattern of an inability to meet financial obligations as they fall due, which is the statutory test for insolvency.
3.2. The KEBS Dispute: Regulatory and Financial Pressures
Simultaneously, KISCOL was embroiled in a protracted and high-profile legal war with the Kenya Bureau of Standards (KEBS), a state regulatory agency. This dispute, which began in 2018, concerned approximately 5,000 tonnes of KISCOL’s brown sugar that KEBS, along with the Kenya Revenue Authority (KRA), alleged was contaminated with mercury and unfit for human consumption. KISCOL vehemently disputed these findings and fought to prevent the destruction of its stock.
The financial and reputational damage from this dispute was immense. More importantly, it led to direct legal assertions about KISCOL’s financial health. In September 2025, KEBS petitioned the High Court to compel KISCOL to deposit KES 135 million as security for legal costs. The grounds for this application were explicit: KEBS argued that KISCOL’s “financial instability and ongoing insolvency proceedings” made it unlikely that any costs awarded to the agency would be recoverable. KEBS went further, alleging in its court filings that KISCOL was actively “transferring assets to related entities and using proxies to continue operations,” raising serious concerns about asset dissipation.
How this broader context influenced judicial attitude
The Epco petition and the KEBS dispute were mutually reinforcing. The existence of the Epco insolvency petition was used by KEBS as direct evidence of instability; conversely, KEBS’s public allegations of asset dissipation undermined KISCOL’s credibility in the Epco matter. Net effect: a pervasive judicial narrative of deep financial distress, tilting courts toward allowing the insolvency inquiry to proceed in protection of the general body of creditors.
Part IV: Strategic Implications and Forward-Looking Recommendations
The Court of Appeal’s judgment in Kwale International Sugar Company Limited v Epco Builders Limited & 2 others offers a sophisticated framework with practical consequences. It clarifies the interface between legitimate dispute resolution (e.g., arbitration) and creditor protection under insolvency law, and it provides guidance for parties on how to structure strategy, evidence, and risk when both tracks are in play.
4.1. For Contractors (Creditors): The Insolvency Sword
Why it matters: Insolvency remains a uniquely high-leverage tool—threatening corporate existence often motivates payment. But it is not a shortcut for messy, unliquidated valuation disputes. Use it carefully, with precision.
Your text (kept intact, lightly formatted): The precedent confirms that insolvency proceedings remain a uniquely potent, high-leverage instrument in a creditor’s arsenal… It is not a shortcut for the resolution of complex, unliquidated valuation disputes.
4.2. For Employers & Developers (Debtors): The Documentary Shield
Reality check: An arbitration clause helps, but it doesn’t block insolvency jurisdiction. The best shield is evidence: show a genuine and substantial dispute on the merits and demonstrate overall solvency.
Your text (kept intact): For debtors… the most effective defense is to proactively and robustly demonstrate that the debt is subject to a genuine and substantial dispute… and that the company is otherwise solvent.
4.3. For Legal Practitioners & Arbitrators: Navigating the New Terrain
Mindset shift: Run parallel tracks. Manage merits (contract claim) and existence (insolvency risk) together. Arbitration clauses don’t oust insolvency—but well-timed steps can recalibrate the court’s view.
Your text (kept intact): Dual-track advisory… creditors must address both debt specifics and debtor solvency; debtors must prosecute the dispute on merits while evidencing overall viability.
4.4. For Funders & Investors: Due Diligence Redefined
Beyond the balance sheet: A litigation profile is a governance signal. Multiple creditor petitions and regulator actions often indicate deeper cashflow and culture issues.
Your text (kept intact): Due diligence must capture ongoing/threatened litigation; persistent multi-front disputes can expose a high-risk management style that leans on legal maneuvering over performance.