INTRODUCTION
The
newly documented Insolvency Act, illustrates the procedure required in the
execution of bankruptcy proceedings among these procedure is the commencement
of bankruptcy of natural persons. The forthcoming work will illustrates the
Acts provision in line with the vast roles of the bankruptcy trustee as he or
she successfully reliefs the debtor, from such obligation. The following write
up illustrates the mitigating attributes in this process of relief, it focuses
firstly on the irregular transactions that the bankrupt undertook in,
thereafter the processing of claims against the debtor instituted by creditors
hereafter referred to as claims against bankrupt’s estate.
It
is in bankruptcy proceedings that all the affairs of the bankrupt are exposed
and therefore the bankrupt’s estate is also procedurally provided for in terms
of its execution on the relief of the debts incurred. Discharge of bankrupt
from bankruptcy, is a formality required as this finalizes the stage of relief
it also brings back the status of the bankrupt to now a discharged bankrupt.
Last but not least, the court may annul bankruptcy order. A scheme of
arrangement is constituted thereafter and creditors are fully satisfied from
such. Lastly, bankruptcy offences are made significant and the penalties
thereafter.
Status of bankrupt's contracts
Bankruptcy trustee has
the power to continue or disclaim bankrupt's contracts entered into before
bankruptcy commenced.[1] In
so doing, he may consider if the contract is
burdensome or instead of adding value leads to rise in costs and
unwanted expenses to disclaim it or in case of the reverse continue with it
subject to the terms of the contract and all relevant rules of law.[2]
In case where the
other party to the contract in which the Bankrupt is a party decides to
terminate the contract in consequence of the bankruptcy; Irrespective of what
the contract provides, the bankruptcy trustee may recover such amount from the
other contracting party as the Court considers fair and reasonable.[3]
Where the Bankrupt is
jointly liable under a contract with another person, that person may sue or be
sued on the contract without the bankrupt being joined as a party to the
proceeding.[4] This
is to say that Bankrupt's co-contractor may sue or be sued if there is a joint
Contractual Liability.[5]
Bankruptcy trustee may
even go father to recover money paid as advocate's costs paid by a bankrupt to
his/her advocate for costs in obtaining a bankruptcy order even if the payment
was made before or after the bankruptcy commenced.[6]
Irregular transactions
Firstly, what the law
considers as being irregular transactions are listed below-
a) An insolvent transaction
b) An insolvent charge
c) An insolvent gift
the above
transactions, are ones that
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.
d) A transaction at undervalue;
e) A contribution by the bankrupt to the property
of another person.[7].A
two year period or a six months period referred can be extended in the case of
a Bankruptcy order made on a creditor's application-by the period between the
time when the application was served on the bankrupt and the time when the
bankruptcy order was
Made; and also in the
case of a bankruptcy order made on the bankrupts own application while a
creditors application was pending- by the period between the time
when the creditor's
Application was served
on the bankrupt and the time when the bankruptcy order was made.[8]
Insolvent transactions
may be cancelled by a bankruptcy trustee, ones that were made within
Two years immediately
before the bankruptcy commenced.[9]
An insolvent
transaction by a bankrupt is a transaction that is entered into or made at a time
when the bankrupt is unable to pay the bankrupt's debts; and one that 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. The examples of such
transactions are listed below-
a) Conveying or
transferring the bankrupt's property;
(b) Giving a charge
over the bankrupt's property;
(c) Incurring an
obligation;
(d) Undergoing an
execution process;
(e paying money
(including money paid in accordance with a judgment or an order of a court);
f) Any other act done
or omitted to be done for the purpose of entering into such a transaction or
giving effect to it.[10]
As far as it regards
to the insolvent transaction listed above, if it was made six months before the
bankrupt is adjudged bankrupt, the transaction is presumed until proven
otherwise. (S. 198)
At times, there can be
a series of transactions made between a creditor and the bankrupt, thus such
transactions can be termed as being one single transaction.
Insolvent charges can
be cancelled by the bankruptcy trustee, over any property, 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 bankrupt's due debts.[11]
However, a charged under this section may not be cancelled if it secures) money
actually advanced or paid;
(b) The actual price
or value of property sold or transferred; or
(c) Any other valuable
consideration given, in good faith by the secured creditor to the bankrupt at
the time when, or at any time after, the charge was created.
But, 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 bankruptcy commenced, except to
the extent that-
(a) The amount secured
by the substituted charge is greater than the amount that was secured by the
earlier charge; or
(b) 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.[12]
There is a Presumption
that a bankrupt is unable to pay due debts until it is proven otherwise. lf, 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, section 200 does not affect the charge 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. .[13]
However, 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 under section 200.
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 (a) the
bankrupt made the gift during the period beginning five years and ending two
years before , .' the commencement of the bankruptcy; and
(b) At the time when
the gift was made, the bankrupt was unable to pay the bankrupt's debts. (S.207).[14]
Below, is the
procedure for cancelling irregular transactions such as and insolvent
transaction, an insolvent charge, an insolvent gift, it is as follows-
(a) Lodge a notice
with the Court that complies with subsection (3); and
(b) Serve the notice on
(i) the other party to the transaction; and (ii) any other party from whom the bankruptcy
trustee intends to recover.
A notice is that) is
in writing;
b) States the bankruptcy trustee's postal and
street addresses and e-mail address (if any);
c) specifies the irregular transaction to be
cancelled;
d) describes the property, or states the
amount, that the bankruptcy trustee wishes to recover;
e) Includes 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 at that
trustee's postal, street
or email address
within twenty-one days after service on that person of that trustee's notice;
f) States that a person making an objection is
required to specify the reasons for the
Objection;
g) States that the transaction will be cancelled
as against the person named in the notice if that person does not object; and
h) States that if the
person named in the notice does object, the bankruptcy trustee may apply to the
Court for the transaction to be cancelled.
Furthermore, An
irregular transaction is automatically cancelled in relation to a person on whom
the bankruptcy trustee has served a bankruptcy trustee's notice, if the person
has not objected by sending to the bankruptcy trustee a notice of objection
that is received by the bankruptcy
trustee at that trustee's postal, street or email address within twenty one
days after the bankruptcy trustee's notice has
been served on that person, and 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
(a) For the retransfer
to the bankruptcy trustee of the property or interest in the property; or
(b) For
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.
But, The Court may not
make an order for the provision stated above, against a person if the person
proves that when the person received the property or interest in the property
(a) The person acted
in good faith;
(b) A reasonable
person in the same position would not have suspected that
(i) in the case of an
insolvent gift-the bankrupt was, or would become, unable to pay the bankrupt's debts without the aid of
the property that the gift is composed of;
or
(ii) in the case of any other irregular transaction
of a kind to which the above provision
applies-the bankrupt was, or would become, unable to pay the bankrupt's 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.[15]
The bankruptcy
trustee, may recover from the
party to a transaction
with the bankrupt, you
would use 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 the amount calculated above if
a) The
bankrupt entered into
the transaction with
the party within the
two years immediately before the
bankruptcy commenced; and
(b) Either (i) the
bankrupt was unable to pay the bankrupt's debts when the transaction
Was entered into; or
(ii) the bankrupt became unable to pay the bankrupt's debts as a result of
having entered into the transaction. 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 trustee. Thus, the Court may make the order sought but only if
Satisfied that
(a) The bankrupt was
not paid an adequate amount in money or money's worth for the
Contribution;
(b) The value of the
bankrupt's assets was reduced by the contribution; and
(c) The bankrupt made
the contribution
(i) Within
the two years
immediately preceding the commencement of
the
Bankruptcy; or
(ii) Within the five
years immediately before that commencement, and 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;
c) Provided money to
buy land or any other property in the recipient's name or on the
Recipient’s behalf; or
(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[16]
the court therefore, may ascertain the value of contributions by the bankrupt
(includes any Payments for legal expenses, interest, rates, and other expenses
or charges.) And, order the recipient to pay an amount equal to that value to
the bankruptcy trustee. The Court may order the recipient to pay less than the
value of the contribution, or refuse to order the recipient to pay anything, if
(a) the recipient acted in good faith and has
altered the recipient's position in the reasonably
held belief that the bankrupt's contribution was valid and that the recipient would not be liable to repay it in
full or in part; or
(b) In the Court's opinion, it is unfair that the
recipient should repay all or part of the contribution. In such a scenario, if
the court orders the recipient to repay the bankrupts contribution, it may in
the same or subsequent order-
a) Direct the bankruptcy trustee to sell the whole
or part of the relevant property, and to convey or transfer it to the
purchaser; and
b) Make vesting and other orders that are
necessary for the sale and transfer of the property. Once, bankruptcy trustee
the bankruptcy trustee has received repayment of the bankrupts
Contribution to
property, he shall take the following steps-
Step 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);
Step 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 as was repaid in the above provisions.
Step 3 the bankruptcy
trustee may not pay anything to the bankrupt without having taken steps 1 and2[17].Insolvency
Bill 2015.
Processing of
creditor’s claims against bankrupts estate
As
is well understood by now there are three parties who may declare a person
bankrupt, these are the creditors, the insolvent’s next of kin or ‘’person of
interest’’. It is not as easy as it may seem since certain procedures have to
be followed. The fathers of legislation decided one day that Kenya does not
have sufficient legislation that plays the role of undertakers, in this case
trade and corporate undertakers. The Law on Insolvency is vast and procedurally
clothed in a very tight blanket such that no party under the covers can escape
it. Creditors play a role in the slow death of the insolvent party and
therefore it is upon their claim that the insolvent is declared bankrupt.
The
subsequent chapter will focus on procedural and substantive requirement as is suggested
in the heading. It will firstly focus on the strict definition of a creditor
then highlight the procedural technicalities in processing their claims and the
mitigating factors there too.
A
creditor is plain and simple someone you owe money you (a debtor), this is how
strict the definition can be. Firstly the processing of the creditors claim is
provided for in section 215 to 245 of The Insolvency Act more specifically
Division 20.
A
creditor’s claim is a document that the creditor submits to the bankruptcy
trustee for the purpose of providing a debt.[18] It is also important to note that a claim is
proved when it is allowed by the bankruptcy trustee. What then is a provable
debt? A provable debt is a debt or liability that the bankrupt owes, at the
commencement of the bankruptcy proceeding, after the commencement but before
the discharge because of an obligation incurred by the bankrupt before the
commencement. However not all debts are provable debts, such debts that are not
provable are those such as, fines, penalties instituted by court proceeding.
The
forgoing therefore elucidates on the claims that may constitute debts that are
provable, what then is the procedure. Like any other procedure there are those
mitigating factors such as deadlines and so forth those bureaucratic ills of society’s
protocols. Now, the creditors have to submit the creditors claim before a
stated deadline on top of which a provable death has to have been ascertained,
upon which the bankruptcy trustee has to have established a deadline through an
advert or otherwise. Again in submitting such claim the Creditor should comply
with the procedure and formalities (if any) prescribed by the insolvency
regulations. Of course the creditor is to bear the costs of such seriously do
we need the Act to outline such exogenous of instituting such procedures? The
creditor may amend such claim however it has to conform to his/her previous
claim.[19]
The
next requirement is that the bankruptcy trustee upon receiving such claim must
and will be subject to an examination. Such examination thereafter will be
accepted partially or wholly in allowing it, wholly or partially to reject it,
or may ask for evidence.[20] A
rejected claim will be provided for through notice of its rejection, and most
importantly it should be coupled with reasons.
The
Bankruptcy trustee can be said to act in an inquisitorial fashion, whereby the
law of insolvency gives him powers to collect evidence for the acceptability of
such debt. In so doing, summons are issued to the interested and affected party
these being the creditors also a person who has made a declaration to such
claim and most importantly to add a person who is capable of giving evidence
concerning such claim this could be a manger of a bank which holds the debtor
as its customer. What then happens when these individuals and entities fail to
appear? A warrant of arrest is issued upon them, also upon determination by the
court one may even pay the accumulated expenses incurred as a result of the
warrant of course upon clear grounds that his evidence is important.[21]
Does
the bankrupt have a say in these matters? It follows that the debtor can and
has a right to give notice to the bankrupt to disallow or reject a claim
instituted upon him by these undertakers. This is done through notice, the
bankruptcy trustee is to act upon such claim within fourteen days failure to
which it will be set free to the courts.[22]
The court will exercise its discretion in line with the substance of the claim
and may reject it if it is unsubstantiated.[23]
The
official receiver may also institute proceeding against the bankruptcy trustee
if he rejects such claim or allows such claim that proved to be unworthy ,
hence thereafter not provable. In this case therefore the Court may cancel the
creditor’s claim.[24]
The courts discretion may be attributed under the following parameters; first
and foremost the application should be made within 21 days after the creditor
receives the bankruptcy trustees’ notice of rejection or within such extended
period of the court. The court may consider it as wholly justified and confirm
the decision or partly justified and quash the rest of the decision, or
unjustified and quash the whole decision. It is important to note that a
creditor is not allowed to contest a rejected claim, and therefore it is only the
court acting for the creditor to act upon such[25].
Like
any other proceedings there are those interested parties in and therefore the
law of insolvency has been so kind to accommodate such, since it is in fact
warranted to die a slow quick death with your loved once and also to share such
meat with others.[26]
Such members must notify the trustee of their intentions and their claim of
interest, and thereafter give notice to the court that they wish to appear and
be heard and thereafter is considered a party to the proceedings.[27]
In
most circumstances the workings of trade under the ambit of who owes the other
more than you and I, is connoted under two main creatures of credit these are
the secured creditors and the unsecured creditors.[28]
Security is the primary tool of money lending relationship one would rather
service a loan to an individual with valuable security which gives better room
for recovery. Secured creditors have an upper hand than there sisters and
brothers, this is attributed to the fact that they are secured hence they hold
both possession and a legally binding title conferred to them by the bankrupt.
It is upon which the Law of insolvency gives them options especially in cases
involving property we all know how property is important in Kenya|)[29].
The first option is to realize which means basically to get money back by the
sale of the charged property; this is restricted to the terms of the agreement
of the charged contract. To secondly have the property valued upon which the
balance may fall under a claim by an unsecured creditor. The third option is,
to surrender the property to the bankruptcy trustee and just give it to the
wolf to share it off and relinquish to becoming an unsecured creditor.[30]
How
then is charged property held by a creditor treated by the bankruptcy trustee?
The bankruptcy trustee mandates forcefully within thirty days that the holder
of the charged property chooses one of the options previously stated. Failure
to which the charged property will be assumed to have been surrendered, like in
all, most circumstances such blessings must be confirmed and made absolute in
higher grounds such higher grounds sometimes may be fruitful and bitter are the
courts, the bankruptcy trustee may make an order to the court to invoke some
magic on the charged property to be surrendered by a secured creditor.[31]
The
court may also allow by order for the bankruptcy trustee to surrender such
property as if it were in his custody as if it was not subject to the security,
to appease the spirt of the debt bestowed upon the bankrupt. This is also upon
satisfaction of the overall appeasement and satisfaction by the creditors. If
there are several in which this is to be applied it follows that they rank as
per priority (and that Latin word), such order is then lodged to the official
receiver for recording. If the bankruptcy trusty fails to lodge this order to
the official receiver he will pay a hefty amount of 500,000/=.[32]
What
then happens to property that is subject to a security? A creditor who realizes
property that is subject to a change may prove as an unsecured creditor for any
balance due after valuation and the realization of the net amount. An unsecured
creditor is a creditor who does not hold lien on property or title belonging to
the bankrupt and therefore his right will be subsequent against a secured
creditor.[33]
A secured creditor in this instance who realizes such charged property shall
account to the bankruptcy trustee on the state of affairs thereafter. Such
affairs should include the amounts due interest payable on the debt and the
elapsed time thereto.
What
are the stipulations on this, as much as the two creatures of credit are
allowed to benefit from the secured charged property upon valuation, such
matters of procedure are adjusted by the law which stipulates that in the case
of an initially secured creditor who hold a bankrupts charged property, who
then claims upon valuation on the balance due , the creditor shall ensure that
that the valuation is prescribed under a creditors claim form contains full
particulars of the valuation and the debt of course including the dates.[34]
Also identification of documents and substantiate the debt and the charge
thereafter adduces such evidence as per the wishes of the bankruptcy trustee.[35]
Failure to which, in the case of false statements and omissions is deemed to
have committed an offence. In light of this all the bankruptcy trustee confers
his powers may accept or reject such claims or reject the proposal in part and
wholly as previously alluded to.[36]
We
need to remember that this is a two way traffic, and the creditor in cases of
rejection may submit another claim in line with the original However if the
claim is subject to contingency or is for damages as a result or the amount of
the claim is uncertain the bankruptcy trustee may estimate the amount of the of
course with the guidance of market factors and so forth.[37]
Upon which if the creditors are unsatisfied, the bankruptcy trustee may appear
as respondent.
The
business dealing are such that they encompass, multiple deals and undertakings
where the bankrupt may wish or is forced to deal with mutual creditors for
services to be rendered, the law of insolvency provides for such and therefore
they are provided for in this way. Through the powers of the bankruptcy
trustee, one of which is to deal with these matters is to take an account on
what is due between these mutual creditors, set-off an amount from one party to
the other and allow only the balance of the account to be proved in the bankruptcy.[38]
It should be strictly noted that an individual is not allowed to claim from
this set-off, that has not been put in writing under the creditors claim.[39]
It would be unjust to allow such a claim if not put in writing especially if
the creditor new that the debtor was insolvent, therefore should state that he
in fact did not now the debtor’s state of affairs.
The
creditor may claim pre-bankruptcy interest, in the case of a contract it should
be claimed at the rate stipulated under such and in in the case of a judgment
also the same is applied. Post-bankruptcy interest may also be made payable by
the bankruptcy trustee this is in assumption that a surplus is occasioned.[40]
If it is noted that the surplus does not satisfy this the following is applied
to note also that the interest is to abate rete ably among those debts. The illustration referred to in Section 238
sub-section 3 elucidates on the forgoing.
What
then happens to the remaining surplus? The law of Insolvency provides for
additional post bankruptcy interests on contracts or judgment debt if surplus
remain.[41]
The provisions include those that apply in the case of a judgment debt, the
bankruptcy trustee shall pay the difference between the prescribed rate and the
rate payable. In the case of contract the bankruptcy trustee would pay in the
same manner, noting that such rates are included in contracts. The additional
interest is the amount initially stated during the commencement of the debt
given.
The
prescribed rate being referred to in this case is the rate is the rate during
commencement of the transaction.[42]
Additionally the creditor may deduct trade discounts that would have been
incurred as a result of the nonpayment of the debt. Secured creditors here
after can prove as unsecured creditors if security is void or partly void.[43] A
secured debt is a good debt and therefore a claim can only exist upon its
existence a void security (secured debt) is one that does not exist and also it
can be partially void or wholly void. In the case of partially void debt, the
claim can only concluded to the extent a debt is unsecured[44].
A company may also call for unpaid debts or calls, a company as a legal
personality may also act as a creditor.[45] The
guarantor for a bankrupt may prove a claim in place of a creditors claim on
monies guaranteed to the debtor.[46]
Distribution of
bankrupt's estate
In distribution of the
Bankrupts estate, debts are paid in priority.[47] The preferential debts are
first cleared[48]
then the others follow.[49] The
preferential debts are also ranked in order of priority that is; first priority
claims, second priority claims and third priority claims; while the others
follow which are ranked as unsatisfied claims.[50]
The first priority
claims include remuneration of the Bankruptcy trustee, fees and expenses
incurred to him in performing the duties imposed and exercising the powers
conferred to him; the reasonable costs of the person who applied to the Court
for the order adjudging the person Bankrupt; indemnity of a creditor who
protects or preserves assets of the bankrupt for the benefit of the creditors
of the bankrupt.[51] The
second priority claims include the wages and salaries of the employees and any
other thing owed to employees of the Bankrupt.[52] The third priority claims
include tax deductions and duty payable within the meaning of section 2(l) Of
the Customs and Excise Act.[53]
Then the unsatisfied claims are of the same priority and are to abate equally,[54] and
are payable in full unless the bankrupt's estate is insufficient to satisfy
them.[55] A
creditor may agree to be lowered in priority as against the ranking of the Act.[56]
After all the debts
have being cleared, any surplus remaining is applied in paying interest on
those debts in respect of the periods during which they have been outstanding
since the commencement of the bankruptcy.[57] Here Interest on
preferential debts ranks equally with interest on debts that are not
preferential debts.[58]
Priority ranking of
debts owed to bankrupt’s spouse is below all the other debts. That is, they are
paid after the other debts have been cleared inclusive of the unsatisfied debts
plus their interest.[59] In
a case where a landlord or other person who detrains on goods and effects of
bankrupt his debts are given priority.[60] 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.[61]
On realising the Bankrupts
estate, the Bankrupt trustee shall give notice on either there is intention to
declare a final dividend; or no dividend, or further dividend will be declared.[62] In
the notice, bankruptcy trustee shall include prescribed information and a
statement that requires all claims against the bankrupt's estate to be
established by a final date specified in the notice.[63] However, by application of
any person to the court, the final date as it appears in the notice may be
postponed.[64]
After the final date,
the bankruptcy trustee shall pay any outstanding expenses of the bankruptcy out
of the bankrupt's estate; and if the
bankruptcy intends to declare a final dividend declare and distribute that
dividend without regard to the claim of any person in respect of a debt not
already proved in the bankruptcy.[65]
After everything has been paid, the bankruptcy trustee shall pay any surplus to
the bankrupt.[66]
After the personal
judgement of the Bankruptcy trustee that the administration of the bankrupt's
estate is for practical purposes complete; and the bankruptcy trustee is not
the Official Receiver, the bankruptcy trustee shall summon a final general
meeting of the bankrupt's creditors.[67]
Discharge
of bankrupt from bankruptcy
A
discharge in bankruptcy may be defined as a permanent order that releases the
debtor from personal liability for certain specified types of debts, thereby
releasing the debtor from any legal obligation to pay any discharged debts.[68] A
bankrupt is automatically discharged from bankruptcy three years after the
bankrupt lodges a statement of their financial position[69]
and it has the same effect as if the court had made the order of the discharge.[70]
A
bankrupt may however not be automatically discharged if first the bankruptcy
trustee, or a creditor has objected[71]
with the approval of the court[72]
and the objection has not been withdrawn by the end of the three-year period,
secondly the bankrupt has not completed the public examination which he has to
do and lastly the bankrupt is undischarged from an earlier bankruptcy.
An
objection made by a bankruptcy trustee or creditor has no effect unless it is
done in the manner prescribed by insolvency regulations.[73]
Upon withdrawal of the objection the bankrupt is automatically discharged if
the three year period has elapsed, there is no other objection and he is
neither estopped by an undischarged earlier bankruptcy nor a lack of completion
of public examination.
A bankrupt may at any time apply to the court
for an order of discharge from bankruptcy[74]
provided he had not applied previously and the court had set a date before
which he can make another application.
The
bankrupt may be publically examined before the court concerning discharge. The
bankrupt is summoned by the bankruptcy trustee as soon as is practicable at the
end of the three year period and examined if the trustee or creditor had
objected the discharge and the objection as not been withdrawn, the bankrupt is
due for automatic discharge but is still undischarged from an earlier
bankruptcy and the bankrupt has not completed the public examination required.
A
bankruptcy trustee shall prepare a report containing a comprehensive review of
the bankrupts affairs, the causes of the bankruptcy, the bankrupt's performance
of the bankrupt's responsibilities under the Act, the manner and the extent to
which the bankrupt has complied with the courts orders, the bankrupts conduct
before and after the commencement of 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. The report is made when the bankrupt applies for a
discharge and when the bankruptcy trustee has summoned the bankrupt to be
examined.
A
creditor who intends to oppose a bankrupt’s discharge on grounds not specified
in the trustee’s report shall give the trustee and the bankrupt a notice. The
notice shall specify the ground or grounds for opposing the discharge and is
given within the period prescribed by the insolvency regulations.[75]
The
court on hearing the application of an order of discharge or hearing the public
examination may immediately discharge the bankrupt, discharge the bankrupt on
conditions, discharge the bankrupt but suspend the order for a specified
period, or discharge the bankrupt, with or without conditions at a specified
future date, or refuse to make an order for discharge.
The
court after ordering discharge may impose certain prohibitions on the bankrupt
for a specified period, or without specifying a time limit and May at any time
vary or cancel the prohibition.[76]
These prohibitions include:
·
entering into, carrying on, or taking
part in the management or control of any business or class of business
·
being a director of a company or a
partner of a firm or limited liability partnership;
·
directly or indirectly being concerned,
or taking part, in the management of any company or limited liability
partnership;
·
being employed by a relative of the
bankrupt;
·
Being employed by a company, trust or
other body that is managed or controlled by a relative of the bankrupt.
A
bankruptcy trustee or creditor may make an application to the court for an
order quashing the discharge of a bankrupt at any time before the expiry of two
years after an absolute discharge and in the case of a conditional discharge
two years after the discharge has taken effect. The order is made when the
court is satisfied that the facts have been established were not known to it
when it made the order of discharge and had it known would have justified
refusal of the discharge.[77]
The
effect of quashing an order discharging the bankrupt from bankruptcy is that it
does not affect the rights or remedies that a person other than the bankrupt
would have had if the discharge had not been quashed. Property owned by the
bankrupt when the quashing is made it vests in the trustee and shall apply in
paying the debts that the bankrupt has incurred since the date of discharge.[78]
A
bankrupt may apply for absolute discharge even though the bankrupt is not able
to comply with any or all of the conditions of the bankrupt's discharge. The
court may grant the order if satisfied the bankrupt's inability to comply with
the conditions is due to circumstances for which the bankrupt should not
reasonably be held responsible.[79]
Discharge
from a bankruptcy releases a bankrupt from all debts provable except those
incurred by fraud or fraudulent breach of trust, liability for which the
bankrupt has obtained forbearance through fraud to which the bankrupt was a
party, any judgment debt or amount payable under any order for which the
bankrupt is liable, amounts payable under a Court order made under the
Matrimonial Causes Act and amounts payable under the Children Act.[80]
A
discharge from bankruptcy acts as conclusive evidence of the bankruptcy and of
the validity of the proceedings in course of the bankruptcy. Any order made by
the court refusing to discharge a bankrupt or suspending discharge is recorded
in the relevant register by the official receiver. The bankrupt is also
required to assist the official receiver in the realization and distribution of
the property of the person that is vested in that trustee failure to which he
may be compelled by the court.
Annulment
of bankruptcy orders
To
annul is to declare invalid.[81]
Legally it is to make void forever; to cancel an event or judicial proceeding
both retroactively and for the future so that in the eyes of the law, it never
occurred. A bankruptcy order may also be annulled.[82]
The
effect of annulment is that the property of the bankrupt vested in the official
receiver and not sold or disposed vests in the bankrupt without need of a
transfer.[83]
The validity of any contract, sale, disposition or payment duly made or any
action duly taken by the Official Receiver before the annulment is not affected[84]
and has effect as if not bankruptcy order had been made in respect of the
bankrupt.[85]
An
annulment of bankruptcy may be made by the court or in other instances by the
official receiver. The court makes the annulment order when any person or the
official receiver claiming to have legitimate interest in the matter makes an
application.[86]
The
court upon hearing the application shall make an order of annulment if:
·
On reconsideration it finds that the
bankrupt should not have been adjudged bankrupt- it takes effect from the time
when the application was made.
·
It is satisfied that the bankrupt's
debts have been fully paid or satisfied and that the bankruptcy trustee's fees
and costs incurred in the bankruptcy have been paid- takes effect from the time
when the Court made the order of annulment.
·
it considers that the liability of the
bankrupt to pay the bankrupt's debts should be revived because there has been a
substantial change in the bankrupt's financial circumstances since the
bankruptcy commenced- takes effect from the time when the Court made the order
of annulment.
·
It has approved a deed of composition
under or a voluntary arrangement- takes effect from the time when the Court
made the order of annulment.
The
Official Receiver may annul the bankruptcy order on the application of any
person interested or on the Official Receiver's own initiative. He may do so
under the following grounds:
·
OR considers that the bankrupt should
not have been adjudged bankrupt
·
OR is satisfied that the bankrupt's
debts have been fully paid or satisfied and that the bankruptcy trustee's fees
and costs incurred in the bankruptcy have been paid
·
OR considers that the liability of the
bankrupt to pay the bankrupt's debts should be revived because there has been a
substantial change in the bankrupt's financial circumstances since the bankruptcy
commenced- takes effect from the time when the Court made the order of
annulment.
That
the court has approved a deed of composition under or a voluntary arrangement-
takes effect from the time when the Court made the order of annulment `
Composition
during bankruptcy.
A
composition is an arrangement between a bankrupt and his creditors whereby the
amount he can be expected to pay is liquidated, and he is allowed to retain his
assets, upon the condition of his making the payments agreed upon.
Creditors
may accept such an arrangement through the passing of a preliminary resolution
that contains the terms of the composition. In the event that there is more
than one group of creditors, the delay or failure of one class in accepting the
composition does not prevent the other classes from accepting the composition.
A
composition may only be invalidated by the passing of a special resolution by
creditors confirming the preliminary resolution. In the confirming resolution,
creditors may vary the terms of the composition. A notice of the meeting
convened to pass the confirming resolution must;
a. State generally the terms of the
proposal for composition
b. Be accompanied by a report by the official
receiver on the said proposal.
Composition
with Members of Partnership.
Where
a partnership is adjudged bankrupt, each creditor may make separate
compositions. The majority of creditors in passing the confirming resolution
are separate majorities of each class, with the exception that joint and
separate creditors are to be counted as one body for voting purposes.
A
composition is not binding until it is approved by the court. When done so, it
binds all the creditors in respect to debts payable them by bankrupts.
A
court may decline to approve the composition if;
- Section 276 and 277 is found
- Terms of the composition are not
reasonable or not for the general benefit to all creditors
- Misconduct on the part of the
bankrupt to justify the court’s refusal to approve their discharge.
- Any other reason that would be
deemed satisfactory to the court.
The
courts validation of the composition is conclusive as to the validity of the
composition.
Procedure
to the Approval of the Composition.
The
bankrupt or official receiver may apply to the court for the approval of the
composition. The court will only proceed to hear the application only if it
satisfied that each creditor was given notice of it.
Before
making the approval, the court must;
- Receive a report by the official
receiver on the terms of the composition and the bankrupt’s conduct
- Hear any objection by or on behalf of
any creditor.
When
the court has approved the composition, it may correct any minute errors and
omissions but may not alter the substance of the composition.
After
the Court has approved a composition- :
(a) The bankrupt and the Official Receiver
shall execute a deed of composition for putting the proposal into effect; and
the Official Receiver shall apply to the Court for confirmation of the deed.
If
the court is satisfied that the deed conforms to the composition that it has
earlier approved, it shall direct that the deed be lodged in the Court; and on
lodgment of the deed, quash the relevant bankruptcy order.
(3)
The deed may not Court unless the prescribed commission has been paid to the
Official Receiver.
NB.
The
quashing under subsection (2) does not revert the bankrupt's property in the
bankrupt in accordance with section 274(1).
When
the deed is conformed and the bankruptcy order has been quashed, all creditors
are bound by that deed and the bankrupt’s property according to the Land
Registration Act is to be dealt with as stipulated in the deed.
A
bankrupt that makes a composition with creditors remains liable to them for unpaid
balances of by fraud, incurs or increase the debt, on or before the date of the
composition obtained forbearance of the debt.
Steps
Towards the approval of a composition and execution of a deed.
(a)
The confirming resolution has to have been passed within one month after the
preliminary resolution is passed;
(b)
The Court has to have approved the composition within one month after the
confirming resolution is passed;
(c)
The bankrupt has to have executed the deed of composition within seven days
after the Court approves the composition or, if the Court allows the bankrupt
additional time, within that time.
(2)
If a deadline is not met immediately on the expiry of the deadline-
(a)
The bankruptcy proceedings resume as if there had been no confirming resolution;
and
(b)
None of the periods specified in subsection (1) counts for the purpose of
calculating a period of time for a purpose of this Act.
After
Registrar of the Court records the deed of composition he must;
(a)
Endorse on the deed that it has been recorded in the Court registry; and if
requested to do so by the Official Receiver deliver the deed to the Official
Receiver.
(2)
as soon as practicable after the deed has been recorded in the Court registry,
the Official Receiver shall-
(a)
Take all steps necessary to have early vesting provided for in the deed
registered or recorded in the appropriate public registry or office; and then
return the deed to the Registrar of the Court.
(3)
The Official Receiver shall, subject to the provisions of the deed, give
possession to the bankrupt or the trustee under the composition of-
(a)
The bankrupt's property; or so much of the bankrupt's property as is under the
control of the Official Receiver and that under the composition reverts in the
bankrupt or the bankruptcy trustee.
On
the application of any person aggrieved by a failure to pay an amount in
accordance with a composition approved by the Court, the Court may order that
the failure to pay be remedied.
On
the application of a person who claims to have an interest in a composition
approved by the Court, the Court may make an order enforcing the provisions of
a composition.
(1)
After the preliminary resolution has been passed, the Court continues to have
exclusive jurisdiction in relation to the composition and the deed of
composition, and their administration.
(2)
On an application in relation to the composition, the deed of composition, or
their administration, the Court-
(a)
for the purpose of summoning and examining the bankrupt and witnesses-may
direct the proceeding as if it were a proceeding under Division 17; and
(b)
May make such order or orders as it considers appropriate, including an order
as to the costs of the application.
The
Court shall decide a question arising under a deed of composition according to
the law and practice of bankruptcy, in so far as that law and practice is
relevant.
Bankruptcy
offences.
Bankruptcy
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.
Offences
in relation to property.
A
bankrupt commits an offence if;
(a)
Conceals, or removes from Kenya, any part of their property-
(i)
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
(ii)
At any time after such a judgment or order was made; or
(b)
With intent to defraud any of the bankrupt's creditors-
(i)
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.
A
bankrupt commits an offence if, during the two 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-
(a)
conceals any part of the bankrupt's property to the value of fifty thousand
shillings or more;
(b)
Conceals any debt due to the bankrupt or due from the bankrupt; or
(c)
Fraudulently moves any part of the bankrupt's property to the value of fifty
thousand shillings or more.
(3)
In proceedings for an offence under the above, it is a defense to prove that,
at the relevant time, the bankrupt had no intention to defraud any of the
bankrupt's creditor.
(a) In proceedings for an offence it is a
defense to prove that, at the relevant time, the bankrupt had no intention to
defraud.
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 a written statement of the
bankrupt's financial position that contains Information that is false or
misleading.
The
following persons are material persons for such a determination include;
(a)
A person who is at the relevant time the bankrupt's creditor;
(b)
A person who becomes the bankrupt's creditor as a result of the statement being
made or produced to the person.
(3)
In proceedings for an offence above, it is a defense to prove that at the
relevant time the bankrupt had no intention to deceive.
A
bankrupt commits an offence if, during the two 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-
(a)
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;
(b)
makes, or is a party to the making of, any false entry in any document
affecting, or relating to, the bankrupt's conduct, affairs or property;
(c)
fraudulently parts with, alters, or makes any omission in, or is a party to
fraudulently parting with, altering, or making an omission in, any document
affecting, or relating to, the bankrupt's conduct, affairs or property; or
(d)
Prevents the production of any document relating to the bankrupt's conduct,
affairs or property to any person to whom the bankrupt has an obligation to do
so.
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 their property by means of fictitious
losses or expenses.
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
(b)
The bankrupt obtains the property-
(I)
by making a false representation or doing some other fraudulent act;
(ii)
By falsely stating the position of the bankrupt's financial affairs; or
(iii)
Under the false pretense of carrying on business and dealing in the ordinary
course of trade.
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.
(3)
In proceedings for an offence under above, it is a defense to prove that, at
the relevant time, the bankrupt had no intention to defraud.
A
bankrupt commits an offence if the bankrupt-
(a)
Makes a false representation; or
(b)
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?
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-
(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; attempts to leave Kenya
with any part of that property; or
(b)
prepares to leave Kenya (either temporarily or permanently) while being in
possession of any part of that property.
(2)
In proceedings for an offence above, it is a defense to prove that, at the
relevant time, the bankrupt had no intention to defraud.
A
bankrupt who is found guilty of an offence under a provision of sections 289 to
296 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.
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
b)
Because of the nature of the bankrupt's business or occupation, the bankrupt
might reasonably be expected to have kept such a record.
(2)
A bankrupt who is found guilty of an offence above 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.
A
bankrupt commits an offence 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 an offence
above is liable on conviction to a fine not exceeding one million shillings or
to imprisonment for a term not exceeding two years, or to both.
For
the purposes of sections 298 and 299, a bankrupt is, in the absence of evidence
to the contrary, presumed not to have kept a proper record of the bankrupt's
transactions if, being engaged in a trade or business, the bankrupt has not
kept the required records.
For
the purpose of the above requirement, the required records are those needed to
explain the bankrupt's transactions and financial position in the bankrupt's
trade or business, and includes-
(a)
A record containing entries from day to day in sufficient detail of all cash received
and cash paid;
(b)
If the bankrupt's trade or business has involved dealing in goods-
(i)
A record of all goods sold and purchased; and
(ii)
detailed stock sheets of annual and other stock takings showing the quantity
and the valuation made of each item of stock on hand; and
(c)
If the bankrupt's trade or business has involved supplying services-details of
those services.
(3)
For the purposes of sections 298 and 299, a bankrupt is, in the absence of
evidence to the contrary, presumed not to have preserved a proper record of the
bankrupt's transactions if the bankrupt has not preserved-
(a)
The records listed above
(b)
A record of all goods purchased in the course of the bankrupt's business (with
the original invoices);
(c)
A daily record of all goods sold on credit.
A
bankrupt who-
(a)
Acts or purports to act as a director of a company or as a partner of a firm or
limited liability partnership; or fails without reasonable excuse to comply
with section 152 commits an offence.
(2)
A person who is found guilty of an offence above 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.
A
bankrupt commits an offence if:
(a)
In the course of the administration of the bankrupt's affairs, makes to the
bankruptcy trustee or the Official Receiver (if not the bankruptcy trustee) a
statement that the that the bankrupt knows or has reason to know was false or
misleading in a material respect,
(b)
After becoming aware that any person has lodged a false proof in the
bankruptcy, fails to disclose that fact immediately to the bankruptcy trustee
or to the Official Receiver (if not the bankruptcy trustee);
(c)
Has, during the two years immediately preceding the date on which the bankrupt was
adjudged bankrupt and while the bankrupt was insolvent, given any undue
preference to any of the bankrupt's creditors with intent to defraud any other
of the bankrupt's creditors; or
(d)
Before the bankrupt obtains a final order or discharge from bankruptcy (either
alone or jointly with one or more other persons)
i.
Obtains credit of one hundred thousand shillings or more; of
ii.
Incurs a liability to any person of one hundred thousand shillings or more for
the purpose of obtaining credit for another person
(2)
In proceedings for an offence under the above provision, it is a defense to
prove that, before obtaining the relevant credit, the bankrupt informed the
credit provider that the bankrupt was an undischarged bankrupt.
(3)
In proceedings for an offence under the above, it is a defense to prove that,
before incurring the relevant liability, the credit provider was informed that
the person incurring the liability was an undischarged bankrupt.
(4)
A person who is found guilty of an offence under the above provision is liable
upon conviction, a fine not exceeding one million shillings or to imprisonment
for a term not exceeding twelve months, or to both.
[1]
Insolvency Act 2015 s. 189
[2]
Ibid section 189
[3]
Ibid section.190
[4]
Ibid section 192
[5]
Ibid section 192
[6]
Ibid section 193
[7]
Ibid section 194
[8]
Ibid section195
[9]
Ibid section 196
[10]
Ibid section 197
[11]
Ibid section 200
[12]
Ibid section 201
[13]
Ibid section201
[14]
Ibid sectipon207
[15]
Ibid section210
[16]
Ibid section 212
[17]
Ibid section 214
[18]
Ibid section215
[19]
Ibid n20subsection 2
[20]
Ibid section216
[21]
Ibid n20
[22]
Ibid section217
[23]
Ibid section217(5)
[24]
Ibid section 222
[25]
Ibid section223
[26]
Ibid n25
[27]
Ibid section 224
[28]
Ibid section 226
[29]
Ibid n 28
[30]
Ibid n28
[31]
Ibid section227
[32]
Ibid n31 sub section3
[33]
Ibid section 228
[34]
Ibid n 33
[35]
Ibidn34
[36]
Ibid n35
[37]
Ibid n35 sub section 3
[38]
Ibid section 230
[39]
Ibid section236
[40]
Ibid section 238
[41]
Ibid section 239
[42]
Ibid section 240
[43]
Ibid section 241
[44]
Ibid n43 subsection (b)
[45]
Ibid section244
[46]
Ibid section245
[47]
Ibid section 247
[48]
Ibid second schedule paragraph 2-4
[49]
Ibid second schedule paragraph 5
[50]
Ibid second schedule paragraph 2-5
[51]
Ibid second schedule paragraph 2
[52]
Ibid second schedule paragraph 3
[53]
Ibid second schedule paragraph 4
[54]
Ibid second schedule paragraph 5
[55]
Ibid section 247(2)
[56] Ibid
section 247(7)
[57]
Ibid section 247(3)
[58]Ibid
section 247(4)
[59]
Ibid section 248
[60]
Ibid section 250
[61] Ibid
section 251
[62]
Ibid section 252(1)
[63]
Ibid section 252(2)
[64]Ibid
section 252(3)
[65]
Ibid section 252(4)
[66]
Ibid section 252(5)
[67]
Ibid section 253
[68]
Legal definition, African Law Library, Accessed 31/10/2015
[69]
Ibid section 254 (1)
[70]
Ibid section 255
[71]
Ibid section 254 (2)(a)
[72]
Ibid section 256
[73]
Ibid section 256 (2)
[74]
Ibid section258
[75]
Ibid section 261
[76]
Ibid section 263
[77]
Ibid section 264
[78]
Ibid section 265
[79]
Ibid section 266
[80]
Ibid section 267
[81]
Oxford English Dictionary, Oxford University Press, 2nd Edition
[83]
Ibid Section 274 (1)
[84]
Ibid Section 274 (2) (a)
[85]
Ibid Section 274 (2)(b)
[86]
Ibid Section 272
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