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Jomo Kenyatta University of

Agriculture & Technology, School of


Law
Insolvency Law, Class 3

Bankruptcy Petition

Bankruptcy Petition/Application
Introduction to Bankruptcy
Bankruptcy Petition
Creditors Petition
Debtors Petition
Hearing and determination of the Petition
Effects of Bankruptcy

1. Introduction to Bankruptcy
Bankruptcy is an equivalent of compulsory liquidation
for companies
However in bankruptcy, the procedure does not remove
the individual out of existence: discharge from
bankruptcy follows
Creditors are treated equally (pari passu rule) with a few
exceptions
Previously the statute that applied to Bankruptcy was
the Bankruptcy Act, Cap. 53, which now stands repealed
by the Insolvency Act of 2015.

Introduction to Bankruptcy
continued
Before resorting to the Bankruptcy regime, it is important to establish
whether the debtor is capable of being made bankrupt
Commencement: Bankruptcy deemed to have commenced on the
date bankruptcy order is made (section 41)
Control of bankrupts property: The property of the person
adjudged bankrupt vests in the bankruptcy trustee, or the official
receiver where there is no trustee
Official receiver may continue as the trustee or the creditors may
nominate (section 44)/appoint a private trustee (section 59)
A private trustee may also be appointed by the High Court or the
Creditors committee (section 59)

2. Bankruptcy Petition/Application

2. Bankruptcy petition/Application
Which debtor qualifies? (see section 15)
In Kenya, a petition/application for bankruptcy may be made only if:
The debtor is domiciled in Kenya, and
The debtor is personally present in Kenya on the date the application is made:
- Alternatively,
- the debtor must have been a resident of Kenya or must have had a
place of
residence in Kenya at any time within 3 years immediately
preceding the date the
application is filed, or
- the debtor must have carried out business in Kenya at any time within 3 years
immediately preceding the date the application is
made.
For business presence, it is enough that the debtor is a member of a partnership or
firm carrying out the business

Bankruptcy petitioncontinued
Who can petition the court?
- Creditors: one or more creditors owed by the debtor [see section
and 17]

15(1)(a)

- Application by the debtor on the ground that he is unable to pay his


[section 15(1)(b) and 32]

debts

- The Supervisor of a person currently bound by a voluntary arrangement


adopted following the debtors proposal and approval by creditors (see part IV):
The supervisor is appointed by a debtor who comes up with voluntary
arrangement proposal [section 304(2)]
The work of the supervisor is to perform the functions imposed as a result of
approval of the proposed voluntary arrangement by the creditors [see section
301(1)]

2 (a). Debtors Petition/Application


As already pointed out, a debtor can file his application to high court
for bankruptcy order only on the ground that he is unable to pay his
debts
Two or more debtors who are business partners may make a joint
application for bankruptcy (section 35)
Effect of filing a petition: it immediately removes the estate of the
debtor from separate enforcement proceedings by unsecured creditors.
In England and Wales, whose insolvency regime was transplanted into
Kenya (Insolvency Act of 2015), the test of inability to pay applies
to the current due debts:
See Re Coney (1998)BPIR 333, Paulin vs Paulin (2009) BPIR 572

Debtors applicationcontinued
The court can neither take into account future or
contingent debts, nor look at whether the debtors
liabilities are greater than his/her assets:
Re A Debtor, ex parte the Debtor v- Allen (No. 17 of
1996) [(1967) Ch 590]
A debtor whose creditor had obtained a judgement of
2,400/= against him
was ordered by the court to pay weekly
instalments of a little over a pound per week. The debtor filed a
bankruptcy petition on the grounds that he was unable to pay
the debts, hoping to be adjudged bankrupt and be
discharged from paying the entire 2,400. The trial court agreed and
made a bankruptcy order, but on appeal the order was set aside on the basis
that the debtor could pay all the debts due i.e., the weekly instalments.

Debtors applicationcontinued
The applicant debtor is required to: [sec. 32(4)]
- Publish the notice of the application in a newspaper that circulates within
region where the debtor resides
- Such other publications that may prescribed by the Insolvency

the

regulations

When can the court decline to hear the application? [sec. 32(5)]
Where the application is not accompanied by a statement of the debtors financial
position showing;
- The particulars of debtors creditors and debts, and his liabilities and assets as
may be prescribed by the insolvency regulations as well as any other informational
requirement that may be prescribed
- Where the debtor has failed to publish the notice of the petition
An incorrect or incomplete statement of financial position may be rejected by the
court

Debtors applicationcontinued
When can the court decline to make a bankruptcy order? (See section 33)
Where the total amount of unsecured debts would be less than the prescribed
minimum bankruptcy levels
Where the value of the estate would be equal or more than the prescribed minimum
value
Where the debtor has not in the past five years immediately preceding a
bankruptcy application, been adjudged bankrupt or entered into IVA with creditors
Where the court is of the opinion that it would be appropriate to appoint an
Insolvency Practitioner to prepare an insolvency report about debtors financial
affairs and whether the debtor is willing to make a proposal for IVA.
The court may appoint an insolvency practitioner for purposes of preparing the
above stated report and for purposes of being the Supervisor in relation to the IVA
proposal given by the applicant debtor [section 33(2)]

Debtors applicationcontinued
On receipt of the report from a practitioner, the court may either
make a bankruptcy order or an interim order [section 34 (3)]
The court may also reject an application for bankruptcy order by a
debtor if it amounts to abuse of court process:
Re Betts [(1990)2 KB 39]:
the debtor had evaded committal proceedings against him twice before by
presenting bankruptcy petitions against himself. Such petitions protected
him against enforcement proceedings. The third attempt to remove himself
from his creditors actions failed when the court rescinded the order made.
The court pointed out that it was by no means illegal to obtain protection
from ones creditors by petitioning for bankruptcy. It was just that on the
facts, the debtor was clearly abusing his legal privilege.

2(b). Creditors Application/Petition


Can be filed in regards to the debts that are presently owed or payable at a
certain future date. This is unlike the debtors application for bankruptcy
A creditor or a number of them may make an application for a bankruptcy
order against a debtor who owes them
Nature of debts/debt situations giving basis to a creditors/creditors'
application: [section 17(2)]
Amount of debt or an aggregate which exceeds prescribed minimum
bankruptcy level
The debt(s) is unsecured and is a liquidated amount payable either presently
or at some certain future date
There is no outstanding application to set aside a statutory demand in respect
of the debt or any other debts.

Creditors petitioncontinued
Where the debtor appears either to be unable to pay or to have no
reasonable prospects of being able to pay

A debtor is deemed to appear to be unable to pay where: [section


17(3)]
Non-Compliance with a Statutory Demand: Twenty one days expire
from the date the applicant creditor serves a (statutory) demand on the
debtor who owes him/her, requiring payment of, or securing and
compounding of the said amount, the debtor has not paid, secured or
compounded the debt. ALTERNATIVELY the statutory demand has not
been set aside in accordance with insolvency regulations
Decree/order in respect judgement in favour of the creditor against a
debtor has been returned unexecuted

Creditors Petitioncontinued
Lack of reasonable prospects of paying: [section 17(4)]
Applies where the debt is not payable immediately, and
The applicant creditor has served on the debtor a (statutory )demand requiring the
debtor to prove to the applicants satisfaction that there are reasonable prospects that
the debtor will be able to pay future debts as and when they fall due; and
Twenty one days have lapsed since the demand was served without the debtors
compliance or the setting aside of the demand according to the insolvency regulations
Exceptions to demand period (section 19): a creditor may file an application
before the expiry of 21 days where;
- There is serious possibility that the value of the debtors property or a portion
thereof will reduce significantly within the 21 days
- The application by the creditor before the lapse of 21 days contain a statement to
that effect

Creditors applicationcontinued
Overstatement of the amount of debt in the statutory demand
[section 17(6)]
Overstatement in the statutory demand is invalidated only if:
The debtor notifies the creditor that he disputes the validity of the
demand; and
The debtor does so within the period provided in the statutory demand

Debtors compliance with an overstated demand [section 17(7)]


Happens when;
Debtor takes steps to comply with the correct amount
He pays the correct amount within the period provided in the demand

Creditors applicationcontinued
Application by a Secured Creditor [section 18(1)]
Application for bankruptcy order against a debtor is
primarily meant for unsecured creditors.
However, a secured creditor may apply where;
- The applying secured creditor includes a statement in
his application expressing willingness to give up the
security for the benefit of all bankrupts creditors
- The application is expressed not to be made in
respect of the secured part of the debt

Creditors applicationcontinued
When court may make a bankruptcy order [section 20(1)]
Order made when court is satisfied that the debt, or one of the
debts in respect of which the application is made has not been
paid at the time of filing the application
Where the debt is one which the debtor has no reasonable
prospect of paying
In a nutshell, when the creditor has complied with section 17
Where it is just and equitable to make a bankruptcy order
[section 25(1)(c)
Court will not make an order before expiry of 21 days where
statutory demand has been issued.

Creditors applicationcontinued
Stay of Creditors application/Petition [section 29(1) and 30(1)]
Court may stay the hearing of a bankruptcy petition where;
The debtor has made the disposition of all of his property to a trustee
for the benefit of his creditors
The debtor has made a proposal for IVA
The debtor has applied for a summary instalment order under Part IV
of the Insolvency Act of 2015 [section 323 and 324]
The debtor rejects the claim of debt by the creditor applicant, or the
debtor argues that the amount owed is less than the prescribed
minimum bankruptcy level. [section 30(1)]

Creditors applicationcontinued
Substitution of Creditor as an applicant:
May happen where;
The applicant creditor has not shown due diligence in
proceeding or offers no evidence at the hearing; and
The debtor owes the other creditor Kshs. 250,000 or
more.

Creditors Petitioncontinued
Dismissal of the Petition
Happens when the court is satisfied that the debtor is able to pay all of his
debts
Court takes into account the debtors contingent and prospective liabilities
in determining whether the debtor is able to satisfy all his debts
ALTERNATIVELY, the court may dismiss a petition where it is satisfied that:
- The debtor has made an offer to secure or compound for the
subject matter of the application; and

debt the

- That the acceptance of that offer requires the dismissal of the


petition/application; and
- that the offer has been unreasonably refused

Creditors applicationcontinued
Right of Execution Pending Creditors Application
a. Execution not issued by court
A creditor who makes a bankruptcy application may not issue or continue with an
execution against the property of the debtor to recover a debt which is the subject of the
application. [section 21 (1) and (3)]
However, the creditor may make an application to the relevant court for execution to issue
or to continue with the execution process. [section 21(3)]
The relevant court may make an order for execution to issue only if it is satisfied that the
order will not be detrimental to the interests of other creditors
Debtor or any other creditor may make an application to the relevant court to stop the
issue of execution, or continuance in execution by a creditor. The relevant court may
(section 22):
- Stay the execution on appropriate terms
- Allow the execution to proceed on appropriate terms

Creditors applicationcontinued
b. Execution issued by court
Where the issuing court is not the High Court;
The issuing court may stay the process of execution on
such terms as it deems appropriate; or
Permit the execution process to continue or terms it
deems appropriate
Where the issuing court is the High Court
Execution cannot be stayed in this case

3. Effects of Bankruptcy

Effects of Bankruptcy
Loss of property
Release from the creditor harassment
Personal consequences

Effects of bankruptcycontinued
a. Loss of property
Once a bankruptcy order is made, all the property of the bankrupt and powers that a
bankrupt would have exercised over that property for his benefit vests in the Official
Receiver [section 48(1)(a)]
The property of the bankrupt, whether acquired or coming into his ownership by the
operation of the law, automatically vests in the bankruptcy trustee, whether or not the
said property is in Kenya. The bankruptcy trustee is not required to take any steps to
vest the property in himself. [section 104]
Property under the Insolvency Act is defined as;
"property" includes money, goods, choses in action, land and every
description of property, whether real or personal, legal or equitable, and
whether located in Kenya or elsewhere, and includes obligations,
easements
and every description of estate, interest and profit, present or future, vested
or contingent in, arising out of or incidental to property; section 2(1)

Effects of bankruptcycontinued
Even the property held in trust by the bankrupt becomes vested in
the bankruptcy trustee, but the trustee holds for the benefit of the
beneficiaries [section 106]
Upon an application being made, the court may also order that
any money due to the bankrupt or any money to become due or
payable to the bankrupt is assigned (paid) to the bankruptcy
trustee. [section 107(2)]
The bankruptcy trustee however cannot ignore the rights of
secured creditors [Re Wallis (1902) KB 719]. Nor can the trustee
ignore the set-off rights which an unsecured creditor has against
the bankrupt [Bradley-Hole v Cusen (1953) 1QB 300].

Effects of bankruptcycontinued
i. What property is a bankrupt entitled to retain during bankruptcy?
A bankrupt is allowed to choose and retain the following property during
his bankruptcy;
- A bankrupts necessary tools of trade [value determined by the trustee;
section 161(2)(3)]
- Necessary household furniture and personal effects for the bankrupt
and his relatives and dependents [value determined by the trustee [section
161 (2)(3)]
- A motor vehicle [value not more than Ksh 1 million or if a higher
value is prescribed by the Insolvency Regulations, then that value applies;
section 161(2)(3)]

Effects of bankruptcycontinued
However, the creditors may authorize a bankrupt to retain necessary
tools of trade and household furniture and personal effects whose
value exceed what the bankruptcy trustee or the Insolvency
regulations, as the case may be, have determined.[section 162]
Money: the trustee may allow the bankrupt to retain money in his
possession or in bank for maintenance of the bankrupt, and his
relatives and dependants. The prescribed maximum here is Kshs
100,000. insolvency regulations may prescribe a higher limit, which
then becomes the prescribed maximum. (section 167)
Allowance: the trustee has power to make an allowance out of the
property of the bankrupt for the benefit of the bankrupt, his relatives
and dependants. (section 166)

Effects of bankruptcycontinued
ii. The status of the bankrupts home
Once a bankruptcy order is made, the bankrupts
continued occupancy of his land or house vested in the
trustee is not guaranteed
The trustee has the discretion to require the bankrupt
and his relatives to vacate the land or building, failing
which the trustee may apply to court for an order of
possession of the land or building. [section 155(1)(2)]
The bankrupt or his relatives have the right to be heard
in such an application. [section 155(4)]

Effects of bankruptcycontinued
iv. Forcible take over of property (sec 154)
The bankruptcy trustee or the official receiver, on the
strength of a court warrant may seize any part of the
bankrupts property that is under the control of the
bankrupt or any other person
In executing the warrant, the bankruptcy trustee has
the authority to break open any building or room of the
bankrupt where the bankrupt or his property is
expected to be
The bankruptcy trustee or the official receiver is then

Effects of bankruptcycontinued
v. dealing in bankrupts property (sec 157)
Upon the commencement of bankruptcy, the bankrupt no longer has
the right to claim the property that is part of the bankrupts estate
The above also applies to those that may have a claim through or
under the bankrupt
vi. Status of money paid by a bankrupt to an Advocate
This refers to the fees paid to the bankrupts advocate to obtain a
bankruptcy order
The money is recoverable if it is not prescribed under insolvency
regulations

Effects of bankruptcycontinued
vii. Payment of money or delivery of property to a
bankrupt (sec 191)
The person who pays or delivers the property is
discharged from liability if he can demonstrate that the
payment or delivery was made before the bankruptcy
was advised; and
That he had no knowledge of the bankruptcy or
bankruptcy petition; and
That the delivery was made in ordinary cause of
business or was otherwise made in good faith.

Effects of bankruptcycontinued
b. Prohibition from entering into business [sec. 152)
A bankrupt is not allowed to enter into, carry out or control any business without the
authority of the trustee or the court
A bankrupt is also not supposed to be employed by his relative without the consent of the
court or trustee
He is not supposed to be employed by an incorporated body owned, managed or controlled
by the bankrupts relative without the consent of the court or trustee
Contravention: fine not exceeding Kshs 500,000 or maximum of 2 years imprisonment or
both

c. Status of the bankrupts contract (section 189)


Where a bankrupt had an existing contract, the bankruptcy trustee may continue with the
said contract or disclaim it if it is onerous.
Joint liability in a contract with the bankrupt; the person who entered into contract jointly
with the bankrupt may sue or be sued without involving the bankrupt (section 192)

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