Prepared by Riara Law School 2017 Candidates
Introduction
A. What is the difference between insolvency and
bankruptcy?
Both
insolvency and bankruptcy refers to a situation whereby a legal entity’s
liabilities exceed its assets. Insolvency refers to a financial state where as
bankruptcy is a distinct legal concept as a matter of law.
Insolvency
Insolvency
is defined as a financial condition or state when:
a.) A legal entity or a person’s liabilities (debts)
exceeds their assets (balance sheet insolvency); or
b.) When a legal entity or person can no longer meet their
debt obligations on time as they fall due (cash-flow insolvency).
Upon
becoming insolvent, the legal entity or person must take immediate action to
rectify the situation as soon as possible, in order to avoid possible
bankruptcy i.e.
a.) by generating cash
b.) by minimizing overhead costs
c.) by cutting bank on living expenses and settling
d.) by renegotiating the terms of current debts or
repayments.
Bankruptcy
Bankruptcy
is defined as the result of a successful legal procedure that results from:
a.) An application to a relevant court by a legal entity
or a person to have themselves voluntarily declared bankrupt; or
b.) An application to the relevant court by a creditor of
a legal entity or a person in order to have that legal entity or person
declared bankrupt; or
c.) A special resolution which a legal entity files with
the Registrar of Companies in order to be declared bankrupt.
A
state of insolvency can lead to bankruptcy. However, it is also possible that
the state of insolvency could be temporary and fixable. Thus, insolvency does
not necessarily lead to bankruptcy, but all bankrupt legal entities or persons
are deemed to be insolvent.
B) What is the utility of the laws of insolvency in a
society?
Insolvency
law policies and regulations play an important role in the economy and in
society. They allow honest but unfortunate debtors to obtain a fresh start by
relieving them from their debt.
Insolvency
law policies:
a.) Allow resources to be quickly returned to productive
use by enabling viable but financially troubled companies to restructure
instead of filing for bankruptcy.
b.) Provide a
legislative framework for the liquidation of the assets of an insolvent
individual, corporation or partnership, and the distribution of the proceeds in
a fair and orderly way among the creditors.
c.) Provide for the
appointment of a trustee to take charge of the assets, sell them and distribute
the proceeds.
d.) Provides ways for insolvent businesses or consumer
debtors to avoid bankruptcy by negotiating arrangements with their creditors
for the compromise of their debts and the reorganization of their financial
affairs.
e.) Provide a
legislative framework for the reorganization of insolvent corporate debtors. It
enables an insolvent company to seek a court order staying its creditors from
taking action against it while it negotiates an arrangement with them for the
rescheduling or compromise of its debts.
f.) Provide an alternative framework for the liquidation
and distribution of an insolvent corporation's assets among its creditors. It
is the only legislative vehicle available for the liquidation of major
financial institutions, including banks, insurance companies and trust and loan
companies.
C. The basic principles of the law of insolvency are the
pillars of the institution of this law. What are these principles?
There
are two primary objects of insolvency. The first is to vest all the property
which the debtor has at the commencement of the bankruptcy or acquires before
his discharge in a trustee for distribution amongst his creditors equitably
according to their rights. The second is to release the debtor from his
liability to those creditors at the end of a specified period subject to his
conduct during the bankruptcy.[1]
A
principle is a fundamental truth or proposition that serves as the foundation
for a system of belief or behaviour or for a chain of reasoning[2]
which in this case stands in the support of an institution such as insolvency.
The basic principles underlying the law of insolvency to an individual are as
follows:
- The debtor must surrender all his properties to
the creditors.
- The court is the arbitrator in all matters
relating to insolvency.
- Once discharged; a debtor is freed from his
financial obligations and reverts to his former status in society.
Professor
Goode suggested the following as principles of corporate insolvency law:
- Insolvency law recognizes rights accrued under
the general law prior to liquidation
- Only the assets of the debtor company are
available for the creditors
- Security interests and other real rights created
prior to the insolvency proceeding are unaffected by the winding up
- The liquidator takes the assets subject to all
limitations and defences
- The pursuit of personal rights against the
company is converted into a right to prove for a dividend in the
liquidation
- On liquidation the company ceases to be the
beneficial owner of its assets
- No creditor has any interest in specie in the
company’s assets or realizations
- Liquidations accelerates creditors’ rights to payment
- Unsecured creditors rank pari passu
- Liquidations accelerates creditor’s rights to
payment
D. How are the principles of the law of insolvency
manifested in Kenya’s Insolvency Act 2015?
This
section of the essay will cover personal insolvency principles in relation to
the Insolvency Act 2015. The debtor must surrender all his properties to the
creditors; is seen in section 140 (1) of the Act which states that, a bankrupt
shall, to the best of their ability assist in the realisation of the bankrupt’s
property and the distribution of the proceeds among the creditors. Section 141
and 142 support this principle. Secondly, Once discharged; a debtor is freed
from his financial obligations and reverts to his former status in society is
contested by section 263 which provides that the court may prohibit the
bankrupt from engaging in business after discharge. However section 267 (1)
provides that a bankrupt may be released of debt on discharge.lastly, the court
is the arbitrator in all matters relating to insolvency is a principle seen
throughout the Act.
F. What are the objectives of the Kenya's Insolvency
Act 2015?
The Insolvency
Act under section 3 outlines the objects of the Act. The act provides for both
insolvent natural persons and incorporated and unincorporated bodies. The
objectives stated are :
a) To
establish and provide a framework for efficient and equitable administration of
the estate of the insolvent parties to ensure fairness prevails between the
interests of the parties and creditors.
b) In
the case of insolvent natural persons and unincorporated entities with a
redeemable financial position, the insolvency Act aims at:
i.
enabling the
entities/persons to continue operating as usual so as to enable them to pay
their debts to the creditors in full or to their satisfaction
ii.
achieving a better
outcome for the creditors which will make the chances of the creditors being
paid more higher rather than just declaring the entities bankrupt .
c) In
the case of insolvent companies and other bodies corporate with a redeemable
financial position, the insolvency Act aims at:
i.
enabling the entities
continue with business so that they can meet their financial obligations to the
creditors in full or to the creditor's satisfaction
ii.
achieve a better
outcome for the creditors instead of declaring the companies bankrupt
d) In
the case of insolvent unincorporated entities and companies/bodies corporate
with an irredeemable financial position, the Insolvency Act aims at providing
an orderly system for declaring the entities bankrupt so as to ensure
administration and equal division of their estates for the creditor's benefit.
e) Regarding
insolvent companies and bodies corporate with an irredeemable financial
position, the Insolvency act provides for an orderly system for liquidating the
affairs of the companies and efficient administration and distribution of
assets available for the benefit of the creditor
G. Exhaustively discuss the insolvency
practitioners recognised by the Insolvency Act.
An insolvency
practitioner is someone who is licensed and authorised to act in relation to
an insolvent individual,
partnership or company.[3]
The insolvency practitioner can help to rescue a company or unincorporated
entity id it has a redeemable financial position. In the case of an
irredeemable position, s/ he acts as the liquidator by administering and
distributing the business entity's assets to the creditors . This is a new
position brought about by Part 2 of the Insolvency Act 2015. This section of
the Insolvency Act divides the practitioners into two categories due to the
introduction of the incorporated entities in the Insolvency Act.
I.
Insolvency
practitioners in relation to natural
persons
a) Bankruptcy
trustee or Interim trustee
This trustee is
named to move your case through the bankruptcy process until it’s
complete. The bankruptcy trustee manages the property of the debtor
b) Permanent
or interim trustee
The role of a
permanent trustee is in the sequestration of the person's estate. Sequestration
is the court procedure for the administration of the affairs of an insolvent
individual by a trustee in the interests of his creditors. An interim trustee
is appointed first and their main role is to preserve the debtor's estate until
the appointment of a permanent trustee whose function is to compile the assets
and distribute them among creditors in the prescribed order of priority.[4]
c) Trustee
under deed
A trust deed is
the situation whereby a person borrows a loan and transfers legal title of the
property to be held as security to a trustee and he therefore bears the
equitable title to the property. The trustee bearing the legal title is known
as the trustee under deed. The trustee under deed. The trustee is empowered to
sell and dispose of all the assets if the borrower does not pay back the loan.
d) Supervisor
of voluntary arrangement
A voluntary
arrangement is an alternative to bankruptcy and this is where the debtor makes
a proposal to the creditors to come up with a scheme of arrangement of the
financial affairs of the debtors in order to satisfy the debts. The supervisor
in this case is the person who will manage the financial affairs and perform
the functions allocated to him as a result of the approval of the arrangement
by the creditors and debtors under the arrangement.
II.
Insolvency
practitioners in relation to companies
a) The Liquidator
A
liquidator has been described as an officer appointed when a company goes into
liquidation who has the general responsibility of collecting all of the
company’s assets and settling all claims against it before putting the company
into dissolution. The Insolvency Act describes the function of the liquidator
as that of ‘….. liquidating the company's affairs and distributing its assets.’[5]
The
liquidator may be appointed by either the company at a general meeting or by
the creditors to the company at a creditors meeting held to notify of the
intention to liquidate.[6]
It
is important to note that on appointment of the liquidator, the company’s
directors lose their powers. This is so as to allow the liquidator full reign
on his exercise of the company’s assets without interference. On completion of
the process, the liquidator is required to give a full account of the
liquidation showing how it has been conducted and how the company's property
has been disposed of, to a general meeting of the company.[7]
b) The Provisional Liquidator
This
is an officer who is appointed on a provisional basis on the petitioning of the
court for the liquidation of a company. He / She is appointed to safeguard the
assets and businesses of the company and maintain the status quo pending the
hearing of the application.[8]
The functions of the provisional Liquidator are determined by the court.
c) Administrator of the Company
First
and Foremost, when a company is under administration, it is being maintained as
a going concern in order to achieve a better outcome for the company's
creditors as a whole than would likely to be the case if the company were
liquidated (without first being under administration)[9]
It
therefore follows that an administrator is an officer of the court, appointed
by the court, by the holder of a floating charge or by the company directors.
The duty of the administrator is to manage the company's affairs and property.[10]
d) A Supervisor Of A Voluntary Arrangement
A
Voluntary Arrangement is an agreement between a debtor and a creditor(s) of
full or partial payment for a period of time. Such an arrangement can be made
by both natural persons and directors of a company with their respective
creditors. This arrangement is made in the place of a debtor being adjudged
bankrupt or company being liquidated.
Therefore
the Supervisor is an officer tasked with the duty of oversight of the
arrangement. This begins by the supervisor looking over the report by the
proposer of the arrangement and convening meetings between the debtor or
company directors and creditors for approval of the arrangement by the
creditors.
In
the case of a company, once a proposal takes effect as a voluntary arrangement,
the supervisor becomes responsible for “….implementing the arrangement in the
interests of the company and its creditors and monitoring compliance by the
company with the terms of the arrangement.”[11] The
same would apply for a natural person.
H. Are
there other institutions, apart from insolvency practitioners, whose role is
entrenched in the provisions of the Insolvency Act? Who are they? Please
outline each and their respective roles.
Aside
from the insolvency practitioners mentioned above, there are other persons or
offices also involved in the process.
The Official Receiver
This
is an officer of the court who serves under various capacities. These include
but are not limited to:
- Holding property for individuals adjudged
bankrupt where there is no bankruptcy trustee
- Acting as first liquidator when a court makes a
liquidation order against a company.
- Nominating a qualified person to be bankruptcy
trustee in respect of the debtor's property.[12]
- Acting as supervisor in a voluntary arrangement
by a debtor
Judicial enforcement officer
This
is a bailiff or other officer of a court who is “charged with carrying out a
process involving the execution or enforcement of an order or judgment of the
court.”[13]
This
officer may undertake orders involving the possession, seizure, sale or
attachment of a debtors property.
[1] Steven A Frieze, personal
insolvency: law and practice. Third edition pg 1
[2] http://Dictionary,reference.com
[3] http://www.icaew.com/en/technical/insolvency/what-is-an-insolvency-practitioner,
accessed 10/10/15
[4] http://www.jcca.co.uk/media/84670/A-Creditors-Guide-to-Fees-in-a-Bankruptcy-1-.pdf,accessed
10/10/15
[5] Insolvency Act 2015_S.399
[6] Ibid S. 408
[7] Ibid S. 402
[9] Insolvency Act s. 522
[10] Ibid s. 520
[11] Ibid s. 633(1)
[12] Insolvency Act s. 44
[13] Ibid s. 2
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