Bankruptcy Law Notes

 INTRODUCTION
Bankruptcy is the legal status of an individual against whom an adjudication order has been made by the court primarily because of his inability to meet financial liabilities.
An adjudication order in bankruptcy is a judicial declaration that the debtor is insolvent and has the effect of imposing certain disabilities upon him or her and of diverting him of his property for the benefit of his creditors.
Bankruptcy must be distinguished from insolvency which may be defined as inability of a debtor to pay his debts as and when they fall due whether or not a person is insolvent is purely a question of fact thus a person can be insolvent without being bankrupt but he cannot be bankrupt for him to be insolvent.
Objectives of bankruptcy laws
1.      To secure an equitable distribution of the property of the debtor among his creditors according to their respective rights against him.
2.      To relief the debtor of his liabilities to the creditor and to enable him make a fresh start in life free from the burden of his debts and obligations.
3.      To protect the interests of the creditors and the public by providing for the investigation of the conduct and his affairs and for the inquisition of punishments and for the imposition of punishments where there has been fraud and other misconduct on his part.
Reasons for growth in bankruptcy laws
1.      The rise in importance of trading on credit and the need to encourage such trading for commercial purposes.
2.      A change in outlook of society towards those who fail to pay their debts from regarding them as criminals to looking at them only as unfortunate
3.      The need to protect creditors by giving them some relief though not as grace as justly entitled to rather than punishing debtors.
4.      The benefit to the community as  a while in that
a.       The creditors should get something rather than lose all if the debtors could escape with the assets he has or is imprisoned so as to be able to obtain assets in future.
b.      An opportunity is afforded to the debtor to make a fresh start.
Basic principles
1.      The debtor must surrender all his properties to the creditors.
2.      After payment of a percentage of his liabilities the debts may obtain a full discharge from his past debts.
3.      The creditors may grant a debtor a dischargeable where the debtor pays them less than what is prescribed by the law.
4.      The court is the arbitrator in all matters relating to bankruptcy.
5.      Once discharged, a debtor is free from his financial obligations and reverts to his former position/status in the society.
 
Proceedings in bankruptcy
It begins with the presentation to the court of a bankruptcy petition. This petition asks the court for a receiving order to be made with respect to a debtor’s property.
The petition may be presented either by the debtor himself or by a creditor. If presented by the creditor, the petition must be founded or based on an alleged act of bankruptcy which has occurred within three months before the presentation of the petition. If the debtor himself presents the petition, then in itself constitutes an act of bankruptcy. Upon hearing the petition, the court may dismiss it if it has no merits or make a receiving order if found with merits.
The receiving order(RO) doesn’t make the debtors bankrupt but all it does is to place the property of the debtor in safe custody pending outcome of the proceedings. After the receiving , the first meeting  of the creditors is then held at which it is determined whether a composition or scheme of arrangement if one is submitted by the debtor  shall be accepted or whether application  shall be made to the court to adjudicate the debtor’s bankruptcy.
If the creditors decide to apply to the court and do not agree on the arrangements then the court will decide. If the court decided to adjudicate the debtor’s bankruptcy it makes an adjudication order and the debtor will then become bankrupt.
The debtor’s property will then vest in his trustee in bankruptcy that will collect the property and distribute it to his creditors who have proven their debt. The bankrupt must also submit himself to a judicial public examination and at any time after the conclusion of this public examination the bankrupt can apply for his discharge.
The court makes an order of discharge. The bankrupt is discharged from all his debts with certain exceptions provable in bankruptcy and if freed from disabilities against some exceptions imposed against him.

Creditor and debtor
A creditor is any person who is entitled to enforce payment of a debt at law or in equity. A debtor is defined at section 3(2) of the Bankruptcy Act as to include any person whether domicile in Kenya or not who at the time when any act of bankruptcy was done or suffered by him:
a.       Was personally present in Kenya or
b.      Ordinarily resided or had a place or residence  in Kenya or
c.       Was carrying on business in Kenya personally or by his means of an agent or manager.
d.      Was a member of a firm or partnership which carried on business in Kenya and includes a person against whom bankruptcy proceedings have been instituted in a reciprocating territory or who has property in Kenya?
Who may be adjudged bankrupt?
1.      Infants
Generally apart from contracts for necessities, infants are not liable for debts that they had incurred. But if an infant fraudulently contracts debt during his infancy he will be liable for the debts and the creditor may claim in bankruptcy when he is attained the age of majority. This is per the Infant Relief Act of England 1814 which is a statute of general application in Kenya.
Cases:
Re a debtor ex parte commissioner of customs v the debtor
Re Jones ex p. jones
Re A & M
2.      Insane persons(mentally disordered persons/lunatics)
They are also subject to bankruptcy proceedings; however, they cannot be adjudicated bankrupt without the consent of the court.
3.      Married women
Section 117 of the Bankruptcy Act provides that every married woman shall be subject to a law relating to bankruptcy.
4.      Aliens or persons domiciled abroad
They are also subject to bankruptcy proceedings as of section 6 of the Bankruptcy Act if within a year before the date of presentation of the petition has ordinary resided or has a dwelling houses or place of business or has been a member of a firm or partnerships of person which has carried on business in Kenya by means of a partner, agent or manager.
Read case Theopile v AG(1950)
5.      Companies
Bankruptcy proceedings are not applicable to companies in Kenya. These are specifically dealt with under liquidation and winding up provisions of the companies act. Section 118 of the Bankruptcy Act provides that a receiving order shall not be made against any company registered under the companies act.
Case: Re Amina Haji(A debtor)
6.      Partnership
Whether a partnership in general or limited is subject to the provision of Bankruptcy Act…See section 122 of the Bankruptcy Act. (N/B – s. 119 of the bankruptcy Act)
7.      Deceased persons
There is a provision for administration in bankruptcy of estate of a deceased person under section 121 of the Bankruptcy Act. Section 107 of the Bankruptcy Act also enables proceedings already commenced to continue as if the debtor were alive. Where the debtor is dead a petition may be presented by his personal representative when its purpose is to obtain an administration order
8.      Judgment debtor/bankrupt
The Bankruptcy Act doesn’t prevent an un-discharged bankrupt from creating valid debts and since may commit Bankruptcy Act institution of subsequent bankruptcy proceedings before he is discharged from a prior bankruptcy, is permissible. See section 44
Acts of bankruptcy
Provided under section 3(1) of the Bankruptcy Act
1st act: Conveying all property to a trustee for the benefits of creditors generally
If in Kenya or elsewhere a debtor makes a conveyance or assignment of his property to a trustee/trustees for the benefit of his creditors generally he commits an act of bankruptcy. To constitute an act of bankruptcy there must be a conveyance or assignment of the whole or substantially the whole of the debtor’s property. The assignment must be for the benefit of all the creditors generally and not just a class of creditors. A creditor who has recognized a deed of arrangements whereby the debtor has agreed on a plan of repaying the debts cannot rely on that deed as an act of bankruptcy.
2nd act: Fraudulent conveyance within the meaning of section 3(1)(b) of the Bankruptcy Act.
 If a debtor makes a fraudulent conveyance, gift, delivery or transfer of his property or any part thereof he commits an act of bankruptcy. Under the Bankruptcy Act a conveyance is fraudulent if it conveys on one creditor an advantage which could not have under the bankruptcy laws or which tends to defeat or delay creditors irrespective of whether the latter had any dishonest intention. The transaction may be a conveyance a gift, a deliveryor transfer of property and this includes mortgages or pledges as well as actual conveyances and assignments. The conveyance need not be for the benefit of any creditor and such transfers are frequently made for example to amember of the debtor’s family the conveyance need not be of the whole of the debtor’s property. The principles for determining whether a conveyance is fraudulent under the Bankruptcy Act may be summarized as follows:
a.       Whether the debtor transfers all his assets in payment on antecedent debt without receiving any present--- return for them and this --- necessarily defects or delays his other creditors and is a fraudulent conveyance even when the transaction is honestly entered into.
b.      Where a debtor transfers all his assets for a full --- consideration. This is not considered fraudulent conveyance since the effect is merely to change the nature of the property to which the creditor took for satisfaction.
c.       Where a debtor mortgages or otherwise charges all his property to secure an antecedent debt. this is conclusively presumed or fraudulent if against all the creditors---
d.      Where a debtor transfers part of his assets in payment of an antecedent debt. The fraudulent intends must be proved and this will depend on several factors.
                                                              i.      Whether or not there is sufficient property remaining after that transfer to enable the debtor to continue in business and thus satisfy his other creditors? This will depend upon whether the debtor is insolvent at the time.
                                                            ii.      Depend on whether or not the conveyance has the effect of hearing him insolvent.
3rd act: Fraudulent preferences within the meaning of section 3 (1) (c)of the Bankruptcy Act as read with ---49(1).
 If in Kenya or elsewhere he makes any conveyance or transfer of his property or part thereof or creates any charge which would under the Bankruptcy Act be void ---fraudulent preference if you were adjudged bankrupt this constitutes an act of bankruptcy. Every conveyance or transfer by any person unable to pay his debts as they come due in favor of any creditor with a view of giving such creditors or any-----guarantor. For the debt due to such a creditor in preference over the other creditors is deemed to be fraudulent and is void as against a trustee in bankruptcy.
4th act:Leaving Kenya, keeping house and similar acts
 If a debtor departs from Kenya or of outside Kenya remains outside Kenya or departs from a dwelling house or begins to keep house all this constitute acts of bankruptcy.In order to establish this, the creditors must prove that it was the debtor’s intention to defeat or delay his creditors but it is not necessary to show that any creditor was actually defeated. The interest may be presumed if it is a natural consequence of the debtor’s act that the creditors will be defeated or delayed.
These acts of bankruptcy have three hints:
1.      Departing from Kenya or remaining outside Kenya where a person domiciled in Kenya leaves the country after beingpressured for payment by his creditors their a strong presumption that his intention is to defeat his creditors. However, this is not so if the debtor held a permanent residence abroad at which he returns to.
2.      Departing for a dwelling house or otherwise absenting one cell, the absenting must be from the debtor’s place of business or usual residence. It is an act of bankruptcy if the debtor having made an appointment to meet a creditor at a particular place fails to attend the appointment with intent to defeat it.
Re worsley KB 309
A married woman left her place of business without paying her creditors or notifying her change of residence and there was held to be an act of bankruptcy although she left at her husband’s request to live with him where else.
3.      Beginning to keep house--- a debtor keeps house if  he refuses to allow his creditors to see him or-----to some remote part of his house or business premises where ---could gain access to he----must be shown that some creditors has been denied access but the creditors must seek the debtor at a reasonable time.
5th act: levy execution against goods
When a judgment against a debtor remains unsatisfied the judgment creditors will usually seek to enforce it by levying execution on the debtor’s goods. This will constitute an act of bankruptcy available to any other creditors if the goods are sold by the auctioneers or retained by them for 21 days excluding the date when they were taken.
The petition founded on this act must be presented within 3 months thereof. The auctioneer is in possession for the purpose of this section written under a working possession he withdraw his office upon the debtor’s acknowledging that the goods has been seized and allows the debtor’s to continue normal trading in the goods provided that a limit is imposed on the value of the goods which can be dealt with in this way by the debtor
If a 3rd party makes a claim to any goods  seized , the auctioneer must make out an in----summon to determine the ownership of the goods. The period occupied in dealing with these summons is not to be counted in this 21 days.
6th act: declaration of inability to pay debts
Here a formal declaration by the debtor that he is unable to pay his debts or a bankruptcy petition persuaded against himself constitute an act of bankruptcy upon delivery of documents to the proper official of the counts ----a declaration of inability to pay debts is required in form no. 2 of the bankruptcy rules while a declaration of bankruptcy petition is required to be in form no. 3 of the bankruptcy rules.
7th act: bankruptcy notice
This is a notice issued by the courts and served on the judgment debtor calling upon him to pay the amount of the judgment debt or else satisfy the court that he has a counter claim, a set-off or cross demand which equals or exceeds the amount of the judgment debts. The debtors must also show that he could not set up his claim in the action in which the judgment was obtained. A bankruptcy notice must be preceded by a request to issue the notice and this is in the form no. 4 of the bankruptcy rules. If a debtor fails to comply with the provision of a provision of a bankruptcy notice within 7 days he commits an act of bankruptcy. A bankruptcy notice must be in the prescribed form and it must state the consequences of non-compliance. It can only be issued at the instance of a creditor who has obtained a final judgment in a Kenyan or ina foreign country that is recognized in Kenya. The period of 7 days for compliance applies where the notice is served in Kenya. If served abroad the court will fix the time for payment in order to give leave to serve it abroad.----the notice must require payments to be made in exact terms of the judgment, therefore if by agreement with a creditor payment is to be made by installments a notice cannot be issued on the failure to ---pay one installment for the whole of the unpaid balance. If a portion of  the judgment debt has been paid, there being any agreement to take payments by installment the bankruptcy notice must issue for the balance unpaid and not for the whole debt.
But a bankruptcy notice will not be invalidated by reason only but the sum specified in the notice as the amount due exceeds the amount actually due unless the debtor within the time allowed for payment gives notice on the ground of such a misstatement. If the debtor does not give such notice he is deemed to have complied with the bankruptcy notice if within the time allowed he takes such steps as would have  constituted a compliance with the notice had the actual amount due been correctly specified. It should be noted that 2 separate judgment debts cannot be included in one notice. A bankruptcy notice cannot be issued if execution of the judgment date has been stayed. The debtor after service of the notice may seek to have it set aside if he has a counter claim, set-off or cross demand which equals or exceeds the amount of the judgment debt. If the debtor does not successfully challenge the notice or and does not pay the debts or provide satisfactory security for it within the specified time he commits an act of bankruptcy which is available mot only to the conditions issuing the notice but to any other creditors provided that he obtains an affidavit of non-compliance from the creditors issuing the notice.
8th act: giving notice to creditors of suspension or intention to suspend debt.
A statement by a debtor that he has suspended or about to suspend payment or his debt needs no particular formality but the notice must be given in such a manner as to show that his intention was to give information that he has suspended or was about to suspend payment. This will constitute an act of bankruptcy i.e. notice a notice of suspension has been inferred a where e debtor summoned a meeting with his creditors with a view to proposing a composition. It has also been inferred where a debtor made a verbal statement to the managing clerk of the solicitors acting on behalf of his creditors that he was unable to pay his debtor. Anotice given on a without prejudice basis has been held to be admissible as proof of the acts of bankruptcy.
 
 
Application for a bankruptcy order
The application for a bankruptcy order can be made by the debtor, a creditor, or two or more creditors. The application is made to the high court, and it has to be base on a debt or debts owed by the debtor to the creditor or creditors.
APPLICATION BY CREDITOR(S)
Conditions for application
a)      The amount of the debt, or the aggregate amount of the debts, is equal to or exceeds the prescribed bankruptcy level. The bankruptcy level is provided for in the bankruptcy regulations, and this is subject to complex calculations that take into account the amount of assets of the debtor compared to the debts of the debtor.
b)      The debt, or each of the debts, is for a liquidated amount payable to the applicant creditor, or one or more of the applicant creditors, either immediately or at some certain, future time, and is unsecured. For creditors who have secured their debts, they can only apply if:-
                               I.            the application contains a statement by the person having the right to enforce the security that the creditor is willing, in the event of a bankruptcy order being made, to give up the security for the benefit of all the bankrupt’s creditors; or
                            II.            The application is expressed not to be made in respect of the secured part of the debt and contains a statement by that person of the estimated value at the date of the application of the security for the secured part of the debt. For this purpose, the secured and unsecured parts of the debt are to be treated as separate debts.
c)      There is no outstanding application to set aside a statutory demand in respect of the debt or any of the debts.
d)     The debt, or each of the debts, is a debt that the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay. In order to determine whether a debtor is unable to pay a debt, it has to be shown that with regards to debts payable immediately:-
                               I.            The applicant creditor to whom the debt is owed has served on the debtor a demand requiring the debtor to pay the debt or to secure or compound for it to the satisfaction of the creditor, at least twenty-one days have elapsed since the demand was served, and the demand has been neither complied with nor set aside in accordance with the insolvency regulations. The application may be made before the end of the twenty-one day period if—
 (a) There is a serious possibility that the debtor’s property, or the value of any of that property, will be significantly reduced during that period, and the application contains a statement to that effect. However, the court will have to wait for the 21 days to elapse before making a bankruptcy order.
                      II.            Execution or other process issued in respect of the debt on a judgment or order of any court in favour of the applicant, or one or more of the applicants to whom the debt is owed, has been returned unsatisfied either wholly or in part.
The debtor appears to have no reasonable prospect of being able to pay a debt if, but only if, the debt is not immediately payable and:-
                      I.     The applicant to whom it is owed has served on the debtor a demand requiring the debtor to establish to the satisfaction of the creditor that there is a reasonable prospect that the debtor will be able to pay the debt when it falls due
                      II.     At least twenty-one days have elapsed since the demand was served; and
                   III.     The demand has been neither complied with nor set aside in accordance with the insolvency regulations.
Determination of the bankruptcy application
After the application, the court may:
a)      accept the creditor’s application and issue a bankruptcy order, if all the requirements have been made, and if the court is of the opinion that the debtor is unable to pay his debts
b)      dismiss the application if:
                                 I.            It is satisfied that the debtor is able to pay all his debts. This will be determined by the court by looking at the prevailing circumstances and by taking into account the debtors contingent and prospective liabilities. In determining what constitutes a reasonable prospect that a debtor will be able to pay a debt when it falls due, the Court shall presume that the prospect given by the information known to the creditor when the creditor entered into the transaction resulting in the debt was a reasonable prospect
                              II.            If the debtor made a reasonable proposal or an offer for an arrangement to pay his debts, and it was unreasonably refused by the creditors. It is noted here that the debtor must submit the proposal to the court before the determination of the application.
c)      Stay the application by a creditor for bankruptcy on such terms, and for such period, as it considers appropriate. However, If there is more than one bankruptcy application in respect of a debtor, and one application has been stayed by an order of the Court, the Court may make a bankruptcy order in respect of the application that has not been stayed, and shall dismiss the application that has been stayed on such terms as it considers appropriate.
d)     If an application made by a creditor for a bankruptcy order relates to more than one debtor, the Court may refuse to make such an order in respect of one or some of the debtors without affecting the application made in relation to the remaining debtor or debtors
e)      In some cases, debtor will appear in opposition to a creditor’s application in that the debtor does not owe a specified debt to the creditor or owes a specified debt to the creditor, but the debt is less than the prescribed bankruptcy level. In such case, the Court may, instead of refusing the application, stay the application so that the issue arising can be resolved at trial. However, the court may require the debtor to give security to the creditor for any debt that may be established as owing by the debtor to the creditor, and for the cost of establishing the debt.
f)       The court may allow one creditor to be substituted for another, if the applicant creditor has not proceeded with due diligence, or at the hearing of the application offers no evidence. However, the substitute creditor must be owed two hundred and fifty thousand shillings or more.
Execution against the debtor’s property pending the courts determination
A creditor, who petitions the court for bankruptcy order, may not issue or continue an execution process against the debtor in respect of the property of the debtor to recover a debt on which the application is based. To do this, the creditor needs the approval of the court, and the court has to be satisfied that that the interests of the other creditors will not be detrimentally affected
To prevent further execution against the debtors property, the debtor himself, or any of the creditors can apply to the court for an order that stops the issue or continuance of any other execution process. The court can issue the order to stop the execution process, or an order allowing the execution process with conditions. It is to be noted that the other creditors are interested in the preservation of the debtor’s property pending the bankruptcy order.
The execution orders can be issued or stopped by any other court of competent jurisdiction, and not restricted to the high court.
If the bankruptcy petition is dismissed or withdrawn, the execution process will continue as if no bankruptcy petition were made. However, it should be noted that a bankruptcy petition cannot be dismissed or withdrawn without the leave of the high court.
APPLICATION BY DEBTORS
A debtor may make an application to the court for an order adjudging in self bankruptcy only on the grounds that he is unable to pay his debts. The application must be accompanied by the debtor’s financial position as at the date of the application. The financial statement must indicate the amounts and nature of assets and liabilities that the debtor has.The financial statements must be complete and correct; otherwise it will be rejected by the courts.
A debtor who makes an application for a bankruptcy petition must publish a notice of the application in a newspaper of nationwide circulation and in such other publications as may be prescribed by the insolvency regulations from time to time. The debtor must show to the court that the publication was made before the hearing can commence. The purpose of such a publication is to inform the debtor’s creditors of the debtor’s intentions and to inform the public of the debtor’s financial position/situation.
Two or more debtors who are partners in a business may make a joint application for a bankruptcy order.
DETERMINATION OF THE COURT   
Upon hearing the debtor’s application, the court may issue a Bankruptcy Order (BO). The courts may refuse to issue an order if it is satisfied that:
a)      That if a bankruptcy order were made, the total amount of the applicant’s debt could be less than the small bankruptcy level.
b)      That if the bankruptcy orders were made, the value of the bankruptcy estates would be equal to or more than the minimum prescribed value.
c)      That during the five years, immediately preceding the debtor’s application, the debtor has neither been adjudged bankrupt nor made a composition with the debtor’s creditors or a skim of arrangement of the debtor’s financial affairs.
d)     That it could be appropriate to appoint an authorized insolvency practitioner to prepare a report indicating the financial position of the debtor. The insolvency practitioner may also indicate whether the debtor is willing to make a proposal or a voluntary arrangement. The insolvency practitioner is appointed by the court.
DUTIES OF AN INSOLVENCY PRACTITIONER
i.        Prepare a report indicating the financial position of the debtor and indicating whether the debtor is willing to make a proposal for a voluntary arrangement.
ii.      If the insolvency practitioner indicates that the debtor is willing to make a proposal, that practitioner shall also state whether in his opinion a meeting of creditors should be convened to consider the proposal.
iii.                Issue the dates on which, and time and place at which the meeting of the creditors should be held.
APPPOINTMENT OF A TRUSTEE WITH RESPECT TO THE DEBTOR’S PROPERTY
After a creditor’s application has been made, the applicant creditor or any other creditor of the debtor may apply to the court for an order for the appointment of an authorized insolvency practitioner to act as an interim trustee in respect of all or a specified part of the debtor’s property. The purpose of an interim trustee is to conserve the debtors’ property pending the determination of the bankruptcy petition. The interim trustee is authorized to:
i.                    Take control of any property of the debtor.
ii.                  Sell any perishable property of the debtor that is likely to fall rapidly invalid.
iii.                Control the affairs or property of the debtor as directed by the courts.
In order to effect its appointment, the trustees shall publisha notice of the appointment in one or more newspapers circulating in Kenya. It is to be noted that the appointment of the trustee does not take effect until such a notice has been published.
After the appointment of the interim trustee, any creditor of the debtor, may not issue or continue an execution process against the debtor in respect of the property of the debtor to recover a debt on which the application is based. To do this, the creditor needs the approval of the court, and the court has to be satisfied that that the interests of the other creditors will not be detrimentally affected.Caselaw
Re Herman ex parte Pharao& Co. (1915) HBR 41
Ngei v Official Receiver Civil Appeal No. 111 of 1990
Peter MainaWaihenya vs Co-op Bank of Kenya Ltd BC 63 of 2003