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.

WEEK 3

- Receiving order and effects there of

- Appointment and functions of the bankruptcy trustee

- Creditor’s meeting and creditor’s committee

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.

LECTURE 2

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

1^st 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.

2^nd 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.

3^rd 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.

4^th 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.

5^th 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 3^rd 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.

6^th 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.

7^th 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.

8^th 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.

LECTURE 3

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

Re Ainsworth MathekaKioko, BC 132 of 2002

In Re Wanjohi (A Debtor ) BC 24/2004

JosephGitau v Francis Muchai HCCC 604/98

What happens on and after bankruptcy commences

A bankruptcy commences on the date and at the time when a bankruptcy order is made in respect of the debtor

If a doubt arises as to whether an act was done, or a transaction entered into or made, before or after the time when a bankruptcy commenced, it is to be presumed, until the contrary is proved, that the act was done, or the transaction was entered into or made, after that time.

A bankruptcy order becomes binding on the bankrupt and all other persons—

(a) On the expiry of the time within which an appeal may be lodged against the order;

(b) If an appeal is lodged in respect of the order within the appeal period and the Court later confirms the order or the appeal is later withdrawn—the bankruptcy order becomes binding on the confirmation of the order or the withdrawal of the appeal.

When the order becomes binding, the order can no longer be questioned on the ground that it was invalid or that a prerequisite for making it did not exist

When a bankruptcy order commences, all proceedings to recover the bankrupt’s debts are stayed; and the property of the bankrupt and all powers touching on that property will vest in the Official Receiver. However, the Court may, on the application by a creditor or other person interested in the bankruptcy, allow proceedings that had already begun to continue on such terms as the Court considers appropriate.

Within thirty days after the date of the bankruptcy order, the Official Receiver shall publish a notice advertising the order. The publication to be done once in the Gazette, once in a national newspaper, and once in any other publication that the court may direct. However, the official receiver is to seek the directions of the court on publication if the debtor has appealed the order or if he has applied for annulment.

Within thirty days after receiving notice of a bankruptcy order, the Official Receiver shall serve on the bankrupt a notice stating that a bankruptcy order has been made in respect of the bankrupt. The notice will also require the bankrupt to lodge with the Official Receiver a statement setting out the bankrupt’s financial position and specify a deadline for lodging the statement with the Official Receiver. The Official Receiver shall serve the notice at the address of the bankrupt given in the bankruptcy application or at the bankrupt’s address last known to the Official Receiver. However, if the bankrupt has already lodged a statement during the petition period, he will not be required to serve a further statement.

Within fourteen days after being served with the notice, the bankrupt shall lodge with the Official Receiver a statement of his financial position setting out—

(a) Particulars of the bankrupt’s assets;

(b) The bankrupt’s debts and liabilities;

(d) The securities held by the bankrupt’s creditors;

(e) The dates when the securities were given; and

(f) Such other information as may be required by o.r.

A person who in writing claims to be a creditor of the bankrupt is entitled, at all times to inspect the statement of the bankrupt’s financial position; and to take a copy of it or of part of it. However, if a person falsely claims to be a creditor he will in contempt of the Court.

Appointment of interim trustee in respect of debtor’s property

After a creditor’s application has been made, the creditor or any other creditor of the debtor may apply to the Court for an order for the appointment of an authorised insolvency practitioner as 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 debtor’s property pending the determination of the bankruptcy petition. The interim trustee is authorised to:

a) take control of any property of the debtor

b) sell any perishable property or property of the debtor that is likely to fall rapidly in value

c) control the affairs or property of the debtor as directed by the Court

In order to effect his appointment, the trustee shall publish a notice of the appointment in one or more newspapers circulating in Kenya and in such other publication as may be prescribed by the insolvency regulations from time to time. It is to be noted that the appointment of the interim trustee does not take effect until such a notice has been published.

If a bankrupt dies after being adjudged bankrupt, the bankruptcy proceeds in all respects as if the bankrupt were still alive.

The role of the creditors in the bankruptcy is primarily—

(a) to attend meetings of the creditors;

(b) to submit proofs of the debts of the bankrupt; and

First meeting of creditors

The Official Receiver will convene the first meeting of the bankrupt’s creditors within thirty days after the statement of the bankrupt’s financial position is lodged with the Official Receiver. if the bankrupt is late in lodging the statement or fails to lodge a statement at all—the meeting will be convened thirty days after the date on which the bankruptcy order was made.

This will be done by giving notice of the time, date and place of the meeting to the bankrupt, each creditor named in the statement of the bankrupt’s financial position, and any other creditors known to the o.r. In addition to this, The Official Receiver shall publish a notice advertising the time, date and place of the meeting one or more newspapers circulating generally in Kenya and in such other publications as the Official Receiver considers appropriate.

The Official Receiver may delay convening the first meeting of creditors for a period not exceeding fourteen days if the Official Receiver considers that there are special circumstances justifying the delay.

The Official Receiver may decide not to convene a first creditors’ meeting if the Official Receiver has sent to each creditor the statement delivered by the bankrupt and he has received no response from the creditors. In deciding whether to hold this meeting, the O.R will also consider

(a) The bankrupt’s assets and liabilities;

(b) The likely result of the bankruptcy; and

Within seven days after deciding not to convene a first meeting of creditors, the Official Receiver shall send to a notice stating that it is the Official Receiver’s view that a first creditors’ meeting need not be convened and the reasons for not convening the meeting.

The notice should also state that the Official Receiver will convene a meeting only if the Official Receiver receives from a creditor, within fourteen days after sending the notice, a request to convene such a meeting.

Any creditor of the bankrupt may request the Official Receiver to convene such a meeting, and the official receiver shall convene a first meeting of creditors if the request for a meeting appears to be made with the concurrence of at least a quarter in value of the bankrupt’s creditors.

Documents to be sent to creditors by the O.R

The Official Receiver shall send the following documents with the notice of the first meeting of creditors:

(a) A summary of the bankrupt’s statement of assets and liabilities;

(b) a summary of the bankrupt’s explanation of the causes of the bankruptcy; and

However, a failure in sending or receiving the above documents does not affect the validity of the proceedings at the meeting.

BANKRUPTCY TRUSTEES

Appointment of bankruptcy trustees

The power to appoint a person as a bankruptcy trustee in respect of a bankrupt’s estate, or to fill a vacancy in such an appointment, is vested on thecreditors during a meeting of the creditors. In special circumstances, the court and the official receiver may each exercise that power.

The official receiver will only appoint the bankruptcy trustee if the creditors fail to appoint the trustee and in his opinion there is need for such an appointment. If the official receiver thinks that there is no need to appoint a trustee, the official receiver shall notify the court of the same and he automatically becomes the bankruptcy trustee.

The court can only appoint a bankruptcy trustee when a bankruptcy order is made when there is a supervisor of a summary instalment order approved in relation to the bankrupt. In this case, the court appoints the supervisor of the order as bankruptcy trustee in respect of the bankrupt’s estate.

If two or more persons are appointed as joint bankruptcy trustees, such an appointment is not effective unless it makes provision for the circumstances in which the trustees are required to act together and the circumstances in which one or more of them may act on behalf of the others. The appointment of a person as bankruptcy trustee takes effect only if the person accepts the appointment.

A bankruptcy trustee can only be removed from office by an order of the Court, or through a creditor’s meeting convened specially for that purpose.

POWERS OF A BANKRUPTCY TRUSTEE

Powers exercised with approval

1. Power to carry on any business of the bankrupt that is necessary for winding it up beneficially.

2. Power to bring or defend legal proceedings relating to the property comprised in the bankrupt’s estate.

3. Power to accept as the consideration for the sale of any property an amount of money payable at a future time subject to such stipulations as the creditors’ committee or the Court thinks fit.

4. Power to borrow money for the beneficial realisation of the bankrupt’s estate and to give security for the borrowing.

5. Power to refer to arbitration, any debts, claims or liabilities subsisting between the bankrupt and any person who may have incurred a liability to the bankrupt.

General Powers

1. Power to sell any part of the property comprised in the bankrupt’s estate, including the goodwill and book debts of any business carried on or formerly carried on by the bankrupt.

2. Power to give receipts for any money received, and the receipts discharge the person paying the money from all responsibility in respect of its application.

3. Power to prove, rank, claim and draw a dividend in respect of such debts due to the bankrupt as are comprised in the bankrupt’s estate.

4. Power to deal with any property comprised in the bankrupt’s estate to which the bankr/ ;upt is beneficially entitled as tenant in the same manner as the bankrupt might have dealt with it.

Powers conferred by the Creditors committee

(a) To superintend the management of the bankrupt’s estate or any part of it;

(b) To carry on the bankrupt’s business (if any) for the benefit of the bankrupt’s creditors; or

(c) In any other respect to assist in administering the estate in such manner and on such terms as the bankruptcy trustee may direct.

Duties of a Bankruptcy trustee

Establish and maintain a bank account in respect of each bankrupt estate administered by him.
Discharge and refund money to any trainees attached to the bankrupt before he was adjudged bankrupt.
Seek the directions of the court in matters not provided for in the insolvency Act
Keep proper accounting records for each bankruptcy in the form and manner prescribed by the insolvency regulations. A creditor or other person who has an interest in a particular bankruptcy is entitled to inspect the bankruptcy trustee’s accounting records relating to the particular bankruptcy. The records can only be disposed of 3 years after the discharge of the bankrupt.
Prepare and publish a final statementof receipts and payments as soon as practicable after the distribution of the final dividend has been determined
Present and allow the records, accounts, and all other bankruptcy documents to be inspected by the official receiver from time to time.

WEEK 5

- Bankrupt’s property after the bankruptcy

- Goods held under credit purchase transactions

- Second Bankruptcies

- Joint Bankruptcies

Bankrupt’s property after bankruptcy

Until the bankrupt is discharged all property (whether in or outside Kenya) that the bankrupt acquires in the bankruptcy trustee without that trustee having to intervene or take any other step in relation to the property. Any rights of the bankrupt in the property are extinguished. The court may order money due to bankrupt to be assigned to the bankruptcy trustee. However, if the bankruptcy trustee’s interest in property is acquired by or passes to a bankrupt after bankruptcy has commenced the bankruptcy trustee’s interest in the property ends.

Property held by the bankrupt in trust for another person vests in the bankruptcy trustee, who shall assume control of the property and deal with it for the benefit of the beneficiaries of the trust.

Execution creditor may retain execution proceeds only if the creditor completed the execution or attachment before the bankruptcy order was made, and before the creditor had notice that an application for such an order had been lodged. The creditor may also retain as against the bankruptcy trustee a payment made by the bankrupt in the course of the execution or attachment to avoid the execution or attachment.

If a judicial enforcement officer who has taken the property of a debtor in execution is served with notice of the debtor’s bankruptcy before the property is sold or before the execution is completed, the judicial enforcement officer shall deliver to the bankruptcy trustee all money and goods received in satisfaction of the execution. In this case, the costs of the execution are a first charge on the money or goods delivered to the bankruptcy trustee.

On the sale by the judicial enforcement officer of a debtor’s property on which execution has been levied, the purchaser, if acting in good faith, acquires a good title to the property as against the bankruptcy trustee.

Transactions entered into in good faith and for value by the bankrupt after bankruptcy are valid if the person concerned deals with the bankrupt in good faith and for value and if the transaction is completed without an intervention by the bankruptcy trustee

If a bankrupt acquires property after the bankruptcy has commenced, an execution or attachment against the property is valid if it is made in good faith and it is made in respect of a debt or liability incurred by the bankrupt after the bankruptcy commenced.

If two or more persons are adjudged bankrupt jointly, the bankruptcy trustee shall keep distinct accounts in respect of the joint estate and the separate estate of each bankrupt. The bankruptcy trustee shall first apply the joint estate to the debts due by the bankrupts jointly, and the separate estate of each bankrupt to the debts of that bankrupt. The bankruptcy trustee shall then apply any surplus in the joint estate to the separate estate of each bankrupt in proportion to the interest of each bankrupt in the joint estate.

Provision allowed for bankrupt during bankruptcy

A bankrupt may choose and retain as his own property following assets:

(a) The bankrupt’s necessary tools of trade;

(b) Necessary household furniture and personal effects (including clothing) for the bankrupt and the bankrupt’s relatives and dependants; and

The maximum values of those assets are the values fixed by the bankruptcy trustee, apart from the motor vehicle that is restricted to one million shillings. Anything to be retained of more value than provided must be consented to by the creditors by an ordinary resolution passed at a creditors’ meeting.

If the bankrupt has died, a relative or dependant of the bankrupt, who has been approved by the bankruptcy trustee or the Court, may exercise the right to retain assets above for the benefit of the bankrupt’s relatives and dependants.

The bankruptcy trustee may make an allowance out of the property of the bankrupt, for the support of the bankrupt and the bankrupt’s relatives and dependants.

The bankruptcy trustee may allow the bankrupt to retain, for the immediate maintenance of the bankrupt and the bankrupt’s relatives and dependants, money up to one hundred thousand shillings that the bankrupt has in the bankrupt’s possession or in a bank account when the bankruptcy commenced.

Goods held by bankrupt under credit purchase transaction

If a bankrupt acquired goods under a credit purchase transaction before the bankruptcy commenced and the creditor either took possession of the goods within the twenty- one days immediately before the time when the bankruptcy commenced, and after that time still possesses them, the creditor may not sell or dispose of the goods until the expiry of thirty days from the date when the creditor serves a post- possession notice on the bankruptcy trustee. The creditor can only deal with the goods before the lapse of 30 days with the consent of the Bankruptcy Trustee.

The bankruptcy trustee may within the thirty-day period referred to above, introduce a buyer for the goods or settle the bankrupt’s obligations as debtor in accordance with that transaction.

A creditor may prove in a bankruptcy for the money that the creditor was entitled to recover from the bankrupt as a debtor for consumer goods purchased under a credit purchase transaction. If the bankrupt purchased goods under a credit purchase transaction before the time the bankruptcy commenced; and at that time the creditor either has not taken possession of the goods or has he has taken possession of them and has not disposed them off, the creditor may assign the goods to the bankruptcy trustee, and prove in the bankruptcy for the net balance due to the creditor under the transaction.

Second bankruptcies

A bankrupt who acquires property and debts before discharge can be adjudged bankrupt for a second time. Property that is acquired by the bankrupt since the first bankruptcy vests in the bankruptcy trustee in the second bankruptcy. However, the Court may order that all or part of the assets in the second bankruptcy that were acquired independently of the creditors in the second bankruptcy to vest in the bankruptcy trustee in the first bankruptcy. A surplus in the second bankruptcy is an asset in the estate in the first bankruptcy, and is payable to the bankruptcy trustee in the first bankruptcy.

On receipt of notice of the second bankruptcy petition, the bankruptcy trustee shall hold the bankrupt’s property in trust possession until the application for the other bankruptcy has been dealt with. The bankruptcy trustee shall transfer the property and its proceeds, to the bankruptcy trustee in the other bankruptcy if the bankrupt is adjudged bankrupt.

WEEK 6

- Duties of the bankrupt

- Restrictions on Bankrupt during Bankruptcy

- Provisions allowed for the bankrupt during bankruptcy

Case

Re Kushler Limited

Division 14—Duties of bankrupt

Generally, a bankrupt main duty is to assist in the realisation of his property and the distribution of the proceeds among the creditors. It is to be noted that it is in the interest of the bankrupt that the bankruptcy takes the shortest time possible so that he can be granted a fresh start.

The bankrupt is to notify the bankruptcy trustee of any property that was acquired by the bankrupt before discharge if the property is divisible among the creditors. This should be done as soon as possible after acquisition, and failure to disclose amounts to an offence. The bankrupt is also required to deliver the property to the bankruptcy trustee on demand.

A bankrupt shall take all the steps necessary in the realization and distribution of his assets. The steps include the execution by the bankrupt of powers of attorney, transfers, and the delivery of relevant documents

As soon as practicable after being adjudged bankrupt, the bankrupt shall deliver to the bankruptcy trustee relevant documents that are in his possession or control and he should also notify the trustee of relevant documents that are in the possession or control of any other person.

A bankrupt shall give the bankruptcy trustee a complete and accurate list of his property and of the creditors and debtors, and update the lists as necessary. This should be done as soon as possible after the bankruptcy order or on demand by the BT.

The Bankrupt must also attend before the bankruptcy trustee at all reasonable times whenever required by that trustee to do so and also verify any statement by statutory declaration when required by that trustee to do so.

Whenever the bankruptcy trustee requires it, the bankrupt shall provide the bankruptcy trustee with details of the bankrupt’s income and expenditure since the bankruptcy commenced.

A bankrupt is required, within seven days after any change occurs in his name, address, employment or income, notify the bankruptcy trustee of the change.

To give the bankruptcy trustee the information and details that are necessary to prepare a financial statement that shows the financial position of the bankrupt’s estate.

Restrictions on bankrupt during bankruptcy

If required by the bankruptcy trustee to do so, the bankrupt shall pay an amount or periodic amounts during the bankruptcy as a contribution towards payment of the bankrupt’s debts. The bankruptcy trustee may impose conditions with respect to the payments, including conditions as the dates on which and the manner in which they are to be made, and may from time to time amend any such conditions or substitute new conditions for existing ones.

An undischarged bankrupt shall not do the following, without the consent of the bankruptcy trustee or the Court:

(a) Enter into, carry on, or take part in the management or control of any business;

(b) Be employed by a relative of the bankrupt or

(c) Be employed by a company, trust, or any other body that is owned, managed, or controlled by a relative of the bankrupt.

The bankruptcy trustee may require the bankrupt and relatives of the bankrupt to vacate any land or building that is part of the property vested in the bankruptcy trustee under the bankruptcy. If the bankruptcy trustee’s demand is not complied with, the bankruptcy trustee may apply to a court of competent jurisdiction for an order for possession of the land or building.

A bankrupt is entitled at any reasonable time to inspect and to take copies of—

(a) the bankrupt’s accounting records;

(b) the bankrupt’s answers to questions put to the bankrupt in the course of an examination;

(d) all proofs of debt;

(e) the minutes of any creditors’ meeting; and

(f) the record of any examination of the bankrupt.

After the bankruptcy has commenced, the bankrupt may not execute a power of appointment, or any other power vested in the bankrupt, if the result would be to defeat or destroy any contingent or other estate or interest in any property to which the bankrupt may otherwise be beneficially entitled at any time before the his discharge.

A bank is required to notify the bankruptcy trustee of any account that the bankrupt holds with the bank. The bank is also mandated not to pay any money from the account unless the payment is authorised by the BT or by a court order.

Part 4 of the insolvency Act

COMPOSIOTION

BANKRUPTCY OFENCES

WEEK 7

Public examination of the bankrupt

- Before the bankruptcy trustee

- Before the court

Bankrupts contracts

Irregular transactions involving the bankrupt

PUBLIC EXAMINATION OF THE BANKRUPT

1. Public examination by the public trustee

The bankruptcy trustee has discretion of summoning the bankrupt and other relevant persons to appear before him, and be examined under oath. The examination relates to the conduct of the debtor’s affairs and also the whereabouts of his property. The persons may also be required to produce and surrender to the bankruptcy trustee or the Court any document under that person’s control that relates to the bankrupt’s conduct, affairs or property The other relevant persons are:-

1. The bankrupt’s spouse

2. A person known or suspected to be in possession any of the bankrupt’s property or any document relating to the bankrupt’s conduct, affairs or property

3. A person believed to owe the bankrupt money

4. A person believed by the bankruptcy trustee to be able to provide relevant information

Conduct of the examination

The bankruptcy trustee shall ensure that the examination is recorded in writing, and that the person summoned signs the written record unless excused from doing so. If a person refuses to sign the refusal to sign amounts to contempt of court. If a person is summoned and he fails to appear, warrants to appear may be issued against him to appear before the court for examination. The person will be obliged to pay all the costs incurred in summoning him.

A person who is summoned for examination by the bankruptcy trustee is entitled to be paid the expenses incurred in attending the examination, and is not obliged to attend if not paid before the attendance.

A person who is examined or questioned at an examination by the bankruptcy trustee is entitled to be represented by an advocate, and may be questioned by the bankrupt’s advocate, and any answers given by the person form part of the examination.

A creditor, or the creditor’s advocate, is entitled at any reasonable time to inspect the record of the examination of a person

A person shall not, without the approval of the Court, publish a report of any examination of a person summoned for examination by the bankruptcy trustee; or any matter arising in the course of the examination. A person who wishes to publish a report of such an examination or matter may make an application to the Court for approval to publish it. On the hearing of an application made, the Court may give approval for the publication of a report subject to such conditions as the Court may specify.

A person is not entitled as against the bankruptcy trustee to withhold possession of, or claim a lien over—a document that belongs to the bankrupt; or the bankrupt’s business records.

failure to comply with a summons attend the public examination of a bankrupt or fails without reasonable excuse to produce a document that the person is required to produce or fails to answer a question or gives an answer that the person knows, or ought reasonably to know, is false or misleading in a material respect, commits an offence.

No one is excused from answering a question because the question may incriminate or tend to incriminate the person.

2. Public examination before the Court

At any time before an absolute order for a bankrupt’s discharge is made, the bankruptcy trustee; or any of the creditors concerned, may make an application to the Court for an order that the bankrupt be publicly examined before the Court. The Court may make an order directing the bankrupt to be publicly examined before the Court and shall fix a time and date for the holding of the examination at least fourteen days from the date of the order unless the Court is of the opinion that there are compelling reasons for holding the examination sooner. The bankruptcy trustee shall publish a notice advertising the examination at least seven days before the date fixed for holding the examination.

Conduct of the examination

Before the public examination of a bankrupt before the Court begins, the bankruptcy trustee shall lodge with the Court a report on, the bankrupt’s estate, the bankrupt’s conduct and any other matters of which the Court should be informed.

The bankrupt shall attend the examination, and may be examined as to the his conduct, affairs and property. At the examination, the bankruptcy trustee, his advocate or any of the proved creditors may examine the bankrupt. The bankrupt is not entitled to advance notice of who will ask the questions or what the questions will be. The examination is done on oath.

At the examination, the bankrupt shall produce all documents relevant to the examination that the person conducting the examination requires the bankrupt to produce; and answer all questions that that person asks the bankrupt or that the Court allows the bankrupt to be asked.

On the holding of a public examination of a bankrupt before the Court, the Court shall ensure that a written record is made of the examination, and that it is read over to the bankrupt and made available for inspection at all reasonable times by the bankrupt’s creditors or their advocates.

The Court is to make an order declaring that the examination has ended only if it is satisfied that the bankrupt’s conduct, affairs and property have been sufficiently investigated and that the investigation is complete. If the bankrupt does not appear for the examination at the appointed time and has no reasonable excuse the Court may by warrant, have the bankrupt arrested and brought before the Court for examination

A bankrupt is entitled to be paid such expenses for attending a public examination before the Court. If the relevant expenses have not been paid or tendered to the bankrupt, the bankrupt person is not obliged to attend the examination.

IRREGULAR TRANSACTIONS INVOLVING BANKRUPT

The following transactions are deemed to be irregular transactions by the bankrupt before the bankruptcy commenced.

a. an insolvent transaction;

b. an insolvent charge;

c. an insolvent gift;

d. a transaction at undervalue;

e. a contribution by the bankrupt to the property of another person.

1. The irregular transactions are to be cancelled on the initiative of the bankruptcy trustee, and to enable that trustee, in appropriate cases, to recover property or money from a party to an irregular transaction with the bankrupt.

A transaction by a bankrupt can be cancelled on the bankruptcy trustee’s initiative if it is an insolvent transaction, and it was made within two years immediately before the bankruptcy commenced. a transaction is an insolvent transaction by a bankrupt if it is entered into at a time when the bankrupt is unable to pay the his debts; and it enables a creditor to receive more towards satisfaction of a debt by the bankrupt than the creditor would receive, or would be likely to receive, in the bankruptcy. a transaction that was entered into within the six months before a bankrupt is adjudged bankrupt is presumed, until the contrary is proved, to have been made at a time when the bankrupt is unable to pay the bankrupt’s debts. Insolvent transaction presumed when;

(a) Conveying or transferring the bankrupt’s property

(b) Giving a charge over the bankrupt’s property

(d) Undergoing an execution process

(e) paying money (including money paid in accordance with a judgment or an order of a court)

2. A charge over any property of a bankrupt can be cancelled on the bankruptcy trustee’s initiative if the charge was created within the two years immediately before the bankruptcy commenced; and immediately after the charge was given, the bankrupt was unable to pay the his due debts.

However, a charge may not be cancelled if it secures money actually advanced or paid, the actual price or value of property sold or transferred or any other valuable consideration given, in good faith by the secured creditor to the bankrupt at the time when the charge was created. A charge may not be cancelled if the charge is a replacement for an earlier charge that was given by the bankrupt more than two years before the bankruptcy commenced except to the extent that the amount secured by the substituted charge is greater than the amount that was secured by the earlier charge; or the value of the property that was subject to the substituted charge at the date of substitution was greater than the value of the property subject to the earlier charge at that date.

A bankrupt who gave a charge within the six months immediately preceding the commencement of the bankruptcy is presumed, until the contrary is proved, to have been unable to pay the bankrupt’s debts immediately after the charge was created.

If, in relation to property purchased by a bankrupt, the bankrupt has given to the seller a charge over the property within the two years immediately preceding the bankruptcy, the charge will not be affected to the extent that it secures unpaid purchase money, but only if the charge was given not more than fourteen days after the date of the sale of the property to the bankrupt. Money is unpaid purchase money whether it is unpaid in relation to the property over A charge given by the bankrupt under an agreement to give the charge that was made before the two years immediately before the bankruptcy is not liable to be cancelled. Charge agreed before specified period not to be cancelled.

3. A gift made by a bankrupt to another person can be cancelled on the bankruptcy trustee’s initiative if the bankrupt made the gift within the two years immediately preceding the commencement of the bankruptcy.

A gift by a bankrupt to another person can be also cancelled on the bankruptcy trustee’s initiative if the bankrupt made the gift during the period beginning five years and ending two years before the commencement of the bankruptcy and at the time when the gift was made, the bankrupt was unable to pay the bankrupt’s debts.

A bankrupt is presumed to have been unable to pay the bankrupt’s debts for the purpose of subsection unless the person claiming the gift proves that the bankrupt was able to pay the bankrupt’s debts without the aid of the property of which the gift was composed.

Procedure of cancelling irregular transactions

A bankruptcy trustee who wishes to cancel any irregular transaction above shall lodge a notice with the Court and serve the notice on the other party to the transaction, or any other party from whom the bankruptcy trustee intends to recover.

The notice should have the following characteristics

a) be in writing;

b) state the bankruptcy trustee’s contact information

c) specify the irregular transaction to be cancelled

d) describe the property, or states the amount, that the bankruptcy trustee wishes to recover

e) include a statement that the person named in the notice may object to the cancellation of the transaction by sending to the bankruptcy trustee a notice of objection to be received by the bankruptcy trustee within twenty-one days after service on that person of that trustee’s notice;

f) state that a person making an objection is required to specify the reasons for the objection;

g) State that the transaction will be cancelled as against the person named in the notice if that person does not object

h) State that if the person named in the notice does object, the bankruptcy trustee may apply to the Court for the transaction to be cancelled.

An irregular transaction is automatically cancelled if the other party has not objected by sending to the bankruptcy trustee a notice of objection within twenty-one days after the bankruptcy trustee’s notice has been served on that person. The Court may, on the application of the bankruptcy trustee cancel an irregular transaction that is not automatically cancelled. The bankruptcy trustee may disregard a notice of objection that fails to specify the reasons for the objection.

On the cancellation of an irregular transaction under which property of the bankrupt, or an interest in property of the bankrupt, was transferred, the Court may make an order for the retransfer to the bankruptcy trustee of the property or interest in the property. The court may also order the payment to the bankruptcy trustee of such amount as the Court considers appropriate, but the amount may not be greater than the value of the property, or interest in the property, at the time when the transaction was cancelled.

Defences to cancellation of transactions

(a) The person acted in good faith;

(b) A reasonable person in the same position would not have suspected the bankrupt was unable to pay his due debts; and

(c) The person gave value for the property or interest in the property or altered the person’s position in the reasonably held belief that the transfer of the property or interest in the property to the person was valid and would not be cancelled.

4. The bankruptcy trustee may recover from a party to a transaction at an undervalue with the bankrupt an amount calculated in accordance with the following formula: A = B − C where— A is the amount to be calculated; B is the value that the party received from the bankrupt under the transaction; and C is the value (if any) that the bankrupt received from the party under the transaction. The bankruptcy trustee may recover from the party this amount if the bankrupt entered into the transaction with the party within the two years immediately before the bankruptcy commenced, and the bankrupt was unable to pay the bankrupt’s debts when the transaction was entered into or the bankrupt became unable to pay the bankrupt’s debts as a result of having entered into the transaction.

5. The bankruptcy trustee may make an application to the Court for an order directing the recipient of a contribution by the bankrupt to the recipient’s property to pay the value of the contribution to the bankruptcy trustee. The Court may make the order sought but only if satisfied that the bankrupt was not paid an adequate amount in money or money’s worth for the contribution, and the value of the bankrupt’s assets was reduced by the contribution

The bankrupt must have made the contribution within the two years immediately preceding the commencement of the bankruptcy or within the five years immediately before that commencement. The recipient is not able to prove that the bankrupt, either at the time of the contribution or at any later time before that commencement, was able to pay the bankrupt’s debts without the aid of the contribution. A bankrupt has made a contribution to the recipient’s property if the bankrupt has— (a) erected buildings on, or otherwise improved, land or any other property of the recipient;

(b) bought land or any other property in the recipient’s name;

(d) Paid instalments for the purchase of, or towards the purchase of, land or any other property in the recipient’s name or on the recipient’s behalf. Court may order recipient of bankrupt’s contribution to property of another to pay value to bankruptcy trustee.

How bankruptcy trustee is to use repayment of bankrupt’s contribution to property.

1: The bankruptcy trustee shall keep as much of the proceeds as the bankruptcy trustee needs, when added to the other assets in the bankrupt’s estate, to pay the creditors in full (including interest);

2: If there is a surplus after the creditors have been paid in full, the bankruptcy trustee shall pay as much of the surplus to the recipient of the property to which the bankrupt has contributed

3. Pay the bankrupt

WEEK 8

Administration of Estate

- Provable debts

- Secured debts

- Priority of debts

- Distribution of the bankrupt’s estate

- Final meeting of the creditors

Cases

Re Dodds (1890)

Re Parmar (1955)

Official Reveiver vs Aggarwal (1968)

PROCESSING OF CREDITORS’ CLAIMS AGAINST BANKRUPT’S ESTATE

Creditor’s claim is a document that a creditor submits to the bankruptcy trustee for the purpose of proving the debt

A debt is proved when it is allowed by the bankruptcy trustee.

A provable debt is a debt or liability that the bankrupt owes at the commencement of the bankruptcy, or after that commencement but before discharge, because of an obligation incurred by the bankrupt before that commencement.

Therefore, a fine, penalty or other order made by a court ordering the payment of money that has been made following a conviction is not a provable debt, and is not discharged when the bankrupt is discharged from bankruptcy.

Procedure for proving debt: creditor to submit claim form.

A creditor (including a creditor who has a preferential claim) who wishes to claim in the bankruptcy shall submit a creditor’s claim to the bankruptcy trustee before the deadline for submitting claims. It must be in the prescribed form. The creditor is required to bear the costs of proving the debt, unless the Court makes an order as to the creditor’s. The creditor may amend or withdraw the claim, but an amended claim has to comply with the formalities prescribed for the original claim.
The bankruptcy trustee shall examine each creditor’s claim and the grounds of the debt, unless of the opinion that no dividend will be paid to creditors. After examining a claim, the bankruptcy trustee can (a) wholly or partly allow the claim; (b) wholly or partly reject the claim; (c) require further evidence in support of the claim or an item contained in it.
As soon as practicable after rejecting a creditor’s claim, or a part of it, the bankruptcy trustee shall give the creditor a notice rejecting the claim or part and specifying the grounds for the rejection.

The bankruptcy trustee may summon for examination, and examine (on oath or otherwise), any of the following persons:

(a) a person who has submitted a creditor’s claim;

(b) a person who has made a declaration or statement as part of a creditor’s claim;

The bankrupt or any creditor may give the bankruptcy trustee notice to allow or reject a creditor’s claim. Therefore, If the bankruptcy trustee has not made a decision allowing or rejecting the creditor’s claim within fourteen days after receiving the claim, the creditor or the bankrupt may apply to the Court for an order under. On the hearing of an application, the Court shall if make an order allowing the claim or partly allowing the claim or rejecting it altogether.

The Official Receiver, the bankrupt or a creditor may make an application to the Court for an order on the ground that the bankruptcy trustee improperly allowed a creditor’s claim. On the hearing of an application, the Court may make an order cancelling the creditor’s claim or reducing the amount claimed, if it considers that the claim was improperly allowed or was improperly allowed in part.

A creditor whose claim has been rejected by the bankruptcy trustee may apply to the Court to make an order within twenty-one days after the creditor receives the bankruptcy trustee’s notice of rejection of the claim. On the hearing of an application made the Court shall confirm the decision wholly, confirm in part or quash the decision.

If the property of a bankrupt is subject to a charge, the creditor who holds the charge may choose an option. The bankruptcy trustee may, at any time by notice, require a creditor who holds a charge over a bankrupt’s property within thirty days after receipt of the notice, to choose one of the following options

(a) Option 1: to realize the property by having it sold (but only if the creditor is entitled to do so under the terms of the charge); or

(b) Option 2: to have the property valued and prove in the bankruptcy as an unsecured creditor for the balance due (if any) after deducting the amount of the valuation;

(c) Option 3: to surrender the charge to the bankruptcy trustee for the general benefit of the creditors and prove in the bankruptcy as an unsecured creditor for the whole debt.

If a creditor fails to comply with the notice is taken to have surrendered the charge to the bankruptcy trustee under option 3 for the general benefit of the creditors, in which case the creditor may prove as an unsecured creditor for the whole debt

If property of a bankrupt is subject to a security, the bankruptcy trustee may make an application to the Court for an order. On the hearing of an application, the Court may make an order enabling the bankruptcy trustee to dispose of the property as if it were not subject to the security, but only if it is satisfied that the disposal of the property would be likely to provide a better overall outcome for the…

The bankruptcy trustee shall pay interest on all allowed creditors’ claims at the prescribed rate if surplus assets remain after the bankruptcy trustee has paid the claims. The bankruptcy trustee shall pay the interest from and including the date on which the bankruptcy commences to the date on which the debt is paid.) If the surplus is not enough to pay the interest in full on all debts, payment of the interest is to abate rateably among those debts.

A person who obtained an order for costs against the bankrupt before the commencement of the bankruptcy may prove for the amount of those costs even if that amount is not fixed until after that commencement.

If a bankrupt is, at the commencement of the bankruptcy, a shareholder of a company, the company may prove for the amount of unpaid calls on the bankrupt made before that commencement in respect of the bankrupt’s shares; and the value of the liability to calls to be made during the twelve-month period after that commencement.

DISTRIBUTION OF BANKRUPT’S ESTATE

First Priority Debts

The expenses of the bankruptcy have first priority and are payable in the following order

(a) the remuneration of the bankruptcy trustee, and the fees and expenses properly incurred by that trustee in exercising the powers conferred, by Insolvency Act

(b) the reasonable costs of the person who applied to the Court for the order adjudging the person bankrupt

(c) The creditor who protects or preserves assets of the bankrupt for the benefit of the creditors of the bankrupt or company by the payment of money or the giving of an indemnity

Second priority claims

(a) all wages or salaries payable to employees in respect of services provided to the bankrupt during the four months before the commencement of the bankruptcy

(b) any holiday pay payable to employees on the termination of their employment before, or because of, the commencement of the bankruptcy

(c) any compensation for redundancy owed to employees that accrues before, or because of, the commencement of the bankruptcy or liquidation

(d) amounts deducted by the bankrupt from the wages or salaries of employees in order to satisfy their obligations to other persons (including amounts payable to the Kenya Revenue Authority in accordance with Income Tax Act);

(e) any reimbursement or payment provided for, or ordered by the Industrial Court under theLabour Institutions Act, 2007

Third priority claims.

After the second priority claims have been paid, the claims in respect of the following debts have third priority to the extent that they remain unpaid:

(a) Tax deductions made by the bankrupt or company under the pay as you earn rules of the Income Tax Act;

(b) Non-resident withholding tax deducted by the company under the Income Tax Act;

(d) Duty payable within the meaning under the Customs and Excise Act.

Claims having the same priority rank equally among themselves and, subject to any maximum payment level prescribed by or under any written law, are payable in full, unless the property of the bankrupt or company is insufficient to meet them, in which case they abate in equal proportions

Debts of the bankrupt that are neither preferential debts nor debts relating to the bankrupt’s spouse also rank equally between themselves and, after the preferential debts, are payable in full unless the bankrupt’s estate is insufficient to satisfy them, in which case they abate in equal proportions among themselves. Any surplus remaining after the payment of these debts is to be applied in paying interest on these debts in respect of the periods during which they have been outstanding since the commencement of the bankruptcy.

Interest on preferential debts ranks equally with interest on debts that are not preferential debts.

If, before the commencement of the bankruptcy, a creditor agrees to accept a lower priority in respect of a debt than it would otherwise have under the insolvency Act, nothing in the Act prevents the agreement from having effect according to its terms.

Credit provided by a person who was the bankrupt’s spouse at the commencement of the bankruptcy rank in priority after the debts and interest above

If a landlord or other person has distrained on goods or effects of the bankrupt during the thirty day period before the bankruptcy commenced, the preferential claims are a first charge on the goods or effects so distrained, or the proceeds from their sale.

If a bankrupt is a partner of a firm, any creditor to whom the bankrupt is indebted jointly with the other partners of the firm is not entitled to receive money obtained from the realisation of the bankrupt’s separate property until the claims of all of the other creditors have been paid in full.

On realising the bankrupt’s estate or so much of it the bankruptcy trustee shall give notice of an intention to declare a final dividend; or notice that no further dividend, will be declared. The Court may, on the application of any person, make an order postponing the final date.

If it appears to the bankruptcy trustee that the administration of the bankrupt’s is for practical purposes complete, the bankruptcy trustee shall summon a final general meeting of the bankrupt’s creditors. The final general meeting of the bankrupt’s creditors shall receive and consider the bankruptcy trustee’s report of the administration of the bankrupt’s estate, and determine whether the bankruptcy trustee should be released. In the administration of the estate it is the bankruptcy trustee’s duty to retain sufficient sums from the estate to cover the expenses of summoning and holding the final general meeting.

WEEK 9

- Composition or Scheme of arrangement

- Discharge of the bankrupt

- Bankruptcy offences

DISCHARGE OF BANKRUPT FROM BANKRUPTCY

A bankrupt is automatically discharged from bankruptcy three years after the bankrupt lodged a statement of the bankrupt’s financial position, but may apply to be discharged earlier (s.254 of Insolvency Act). The bankruptcy trustee, the Official Receiver or, a creditor may object to a bankrupt’s automatic discharge (s. 256). Therefore, a bankrupt is not automatically discharged if the bankruptcy trustee or a creditor has objected and the objection has not been withdrawn by the end of the three-year period , or if the bankrupt has to be publicly examined and has not completed that examination; or if the bankrupt is undischarged from an earlier bankruptcy.

An objection to the automatic discharge of the bankrupt may be withdrawn in the manner prescribed by the insolvency regulations, and the bankrupt will be automatically discharged on the withdrawal of the objection if a three-year period has elapsed, and there is no other objection to the discharge that has not been withdrawn;

A bankrupt may at any time apply to the Court for an order of discharge from bankruptcy (s.258). However, if the Court has previously refused an application by the bankrupt for a discharge, and has specified the earliest date when the bankrupt may again apply, the bankrupt may not make another application before that date.

(s.259), The bankruptcy trustee shall summon the bankrupt to be publicly examined before the Court concerning the bankrupt’s discharge if the bankruptcy trustee or a creditor has objected to the bankrupt’s automatic discharge and the objection has not been withdrawn, or the bankrupt is due for automatic discharge but is still undischarged from an earlier bankruptcy;

(s.260), the bankruptcy trustee will then prepare a report and lodge it with the Court. The bankruptcy trustee shall include in the report a comprehensive review of the bankrupt’s affairs, the causes of the bankruptcy, the bankrupt’s performance of the bankrupt’s responsibilities, the manner in which, and the extent to which, the bankrupt has complied with orders of the Court, the bankrupt’s conduct before and after the commencement of the bankruptcy, and any other matter that is likely to assist the Court in making a decision as to whether or not to discharge the bankrupt.

A creditor shall give to the bankruptcy trustee and the bankrupt a notice if the creditor intends to oppose the bankrupt’s discharge on a ground that is not mentioned in the bankruptcy trustee’s report. On hearing an application for discharge, the Court may immediately discharge the bankrupt, discharge the bankrupt on conditions, discharge the bankrupt but suspend the order for a specified period; or refuse to make an order of discharge

On making an order of discharge, the Court may prohibit the bankrupt from doing all or any of the following without the Court’s approval. The Court may impose such a prohibition for a specified period, or without specifying a time limit. The Court may at any time vary or cancel a prohibition imposed under this section

(a) Entering into, carrying on, or taking part in the management or control of any business or class of business;

(b) Being a director of a company or a partner of a firm or limited liability partnership;

(c) Directly or indirectly being concerned, or taking part, in the management of any company or limited liability partnership;

(d) Being employed by a relative of the bankrupt;

(e) Being employed by a company, trust or other body that is managed or controlled by a relative of the bankrupt. Court may restrict bankrupt from engaging in business after discharge.

The bankruptcy trustee or a creditor of the bankrupt may make an application to the Court for an order quashing the discharge of a bankrupt at any time before two years lapse after the discharge; The Court may make an order quashing a discharge only if it is satisfied that facts have been established that— (a) were not known to itwhen it made the order of discharge; and (b) had it known of them, would have justified it in refusing a discharge or in imposing conditions in respect of the discharge.

The quashing of a discharge does not affect the rights or remedies that a person other than the bankrupt would have had if the discharge had not been quashed.

The Court may discharge the bankrupt absolutely if satisfied that the bankrupt’s inability to comply with the conditions is due to circumstances for which the bankrupt should not reasonably be held responsible.

On being discharged, a bankrupt is released from all debts provable in the bankruptcy except the following debt:

(a) Any debt or liability incurred by fraud or fraudulent breach of trust to which the bankrupt was a party;

(b) Any debt or liability for which the bankrupt has obtained forbearance through fraud to which the bankrupt was a party;

(d) Amounts payable under a Court order made under the Matrimonial Causes Act;

(e) Amounts payable under the Children Act.

A discharge of a bankrupt from bankruptcy is conclusive evidence of the bankruptcy and of the validity of the proceedings in course of the bankruptcy.

The discharge of a bankrupt does not release a person who, at the commencement of the bankruptcy, was—

(a) a business partner of the bankrupt;

(b) a co-trustee with the bankrupt;

(d) a guarantor or in the nature of a guarantor of the bankrupt.

COMPOSITION DURING BANKRUPTCY

The creditors of a bankrupt may accept a composition in satisfaction of the debts due to them from the bankrupt by passing a special resolution that contains the terms of the composition. If there is more than one class of creditors, the delay of one class in accepting, or the failure of one class to accept, does not prevent any other of the classes from accepting the composition. Composition is not effective unless approved by a confirming resolution. A composition is not binding until it is approved by the Court. When approved by the Court, a composition binds all the creditors in respect of provable debts due to them by the bankrupt.

If the proposal for composition provides for the payment in full of all creditors whose respective debts do not exceed a specified amount, that class of creditors is not to be counted either in number or value for the purpose of counting the requisite majority of creditors for passing the confirming resolution.

As soon as practicable after the Court has approved a composition the bankrupt and the Official Receiver shall execute a deed of composition for putting the proposal into effect the Official Receiver shall apply to the Court for confirmation of the deed.

When the Court has confirmed the deed and quashed the bankruptcy order the deed binds all the creditors in all respects as if they had each executed the deed; the bankrupt’s property to which the deed relates vests, and is to be dealt with, as provided by the deed.

BANKRUPTCY OFFENCES

Offences in relation to debts (s.289)

A bankrupt commits an offence if the bankrupt did not, when contracting a debt, have the capacity to pay the debt when it fell due for payment, as well as to pay all the bankrupt’s other debts. A bankrupt commits an offence if the bankrupt has materially contributed to, or increased the extent of, the bankrupt’s insolvency (a) by gambling (b) by engaging in rash and hazardous speculation; (c) by unjustifiable spending; or (d) by living extravagantly. In the above proceedings it is a defence to prove that, at the relevant time, the bankrupt had no intention to defraud.

Offences in relation to property (s.290)

A bankrupt commits an offence if the bankrupt—

(a) conceals, or removes from Kenya, any part of the bankrupt’s property during the two months immediately preceding the date on which an unsatisfied judgment or order for payment of money was made against the bankrupt, or at any time after such a judgment or order was made

(b) with intent to defraud any of the bankrupt’s creditors makes or causes to be made a gift, delivery or transfer of any part of the bankrupt’s property, or gives or causes to be given a charge over any part of that property.

In proceedings for offences in relation to bankrupt’s property it is a defence to prove that, at the relevant time, the bankrupt had no intention to defraud any of the bankrupt’s creditors.

Offence in relation to written statement to creditor (s.291)

A bankrupt commits an offence if, during the three years immediately preceding the time when the bankruptcy order was made in respect of the bankrupt, the bankrupt makes or produces to a material person (creditor or potential creditor) a written statement of the bankrupt’s financial position that contains information that is false or misleading.

It is a defence to prove that at the relevant time the bankrupt had no intention to deceive.

Offence in relation to documents (s.292)

A bankrupt commits an offence if, during the two years immediately preceding the making of the application to the Court for abankruptcy order in respect of the bankrupt, or at any time after the application was made, the bankrupt conceals, destroys, mutilates or falsifies, or is a party to the concealment, destruction, mutilation or falsification of, any document affecting, or relating to, the bankrupt’s conduct, affairs or property. it is a defence to prove that, at the relevant time, the bankrupt had no intention to conceal the state of the bankrupt’s affairs or to defeat the law

Offence in relation to fictitious losses or expenses (s.293)

A bankrupt commits an offence if, during the twelve months immediately preceding the making of the application to the Court for a bankruptcy order in respect of the bankrupt, or at any time after the application was made, the bankrupt attempts to account for any part of the bankrupt’s property by means of fictitious losses or expenses.

Offences in relation to credit (S.294)

A bankrupt commits an offence if, during the three years preceding the making of the application to the Court for a bankruptcy order in respect of the bankrupt, or at any time after the application was made—

(a) The bankrupt obtains property on credit and has not paid for the property and the bankrupt obtained the property by making a false representation or doing some other fraudulent act; (ii) by falsely stating the position of the bankrupt’s financial affairs; or under the false pretence of carrying on business and dealing in the ordinary course of trade.

b) A bankrupt commits an offence if, during the three years immediately preceding the making of the application to the Court for a bankruptcy order in respect of the bankrupt, or at any time after the application was made, the bankrupt (otherwise than in the ordinary course of business) pawns, mortgages, pledges or disposes of any property that the bankrupt has obtained but for which the bankrupt has not made payment. It is a defence to prove that, at the relevant time, the bankrupt had no intention to defraud.

Offences in relation to obtaining consent of creditors (S.295)

A bankrupt commits an offence if the bankrupt makes a false representation or does any other fraudulent act, for the purpose of obtaining the consent of any one or more of the bankrupt’s creditors to any agreement with reference to the bankrupt’s affairs or the bankrupt’s bankruptcy.

Offence for bankrupt to leave Kenya without consent (S.296)

(a) leaves Kenya (either temporarily or permanently), together with any part of any property to the value of one hundred thousand shillings or more that, by law, ought to be distributed among the bankrupt’s creditors;

(b) Attempts to leave Kenya with any part of that property;

It is a defence to prove that, at the relevant time, the bankrupt had no intention to defraud.

General penalties for bankruptcy offences (S.297)

A bankrupt who is found guilty of an offence is liable on conviction to a fine not exceeding two million shillings or to imprisonment for a term not exceeding five years, or to both.

Failure to keep and preserve proper record of transactions (S.298)

A bankrupt commits an offence if, at any time during the three years immediately preceding the date on which the bankrupt was adjudged bankrupt—

(a) the bankrupt had failed to keep and preserve a record of the bankrupt’s transactions for the period and because of the nature of the bankrupt’s business or occupation, the bankrupt might reasonably be expected to have kept such a record. A bankrupt who is found guilty of this offence is liable on conviction to a fine not exceeding one million shillings or to imprisonment for a term not exceeding twelve months, or to both.

Failure to keep proper records with intent to conceal (S.299)

If with intent to conceal the true state of the bankrupt’s affairs, the bankrupt has failed to keep and preserve a proper record of the bankrupt’s transactions. A bankrupt who is found guilty of this offence is liable on conviction to a fine not exceeding one million shillings or to imprisonment for a term not exceeding twelve months, or to both.

Offence by bankrupt in relation to management of companies (S.301) SEE INCLUDING S.302 OTHER BANKRUPTCY OFFENCES

By: Ms L.

Monday, December 18, 2023

BANKRUPTCY LAW NOTES