8) Bankruptcyi) Acts of Bankruptcyii) Procedure in Bankruptcyiii) Discharge of a debtoriv) Disabilities of undischarged debtor

INTRODUCTION The word refers to the legal status of an individual against whom an adjudication order has been made by the court principally because of his inability to meet his financial liabilities. And this adjudicating order is a judicial declaration that a debtor is insolvent and has the effect of imposing certain legal disabilities upon him and of divesting him of his property for his creditor‟s benefit. Blackstone defines bankruptcy as “A proceeding by which, when a debtor cannot pay his debts or discharge his liabilities or the persons to whom he owes money or has incurred liabilities cannot obtain satisfaction of their claims, the court in certain circumstances takes possession of his property by an officer appointed for the purpose, and such property is realized and distributed in equal proportions among the persons to whom the debtor owes money or has incurred peculiar liabilities”

AIMS OF BANKRUPTCY LAW. The objects of Bankruptcy law are i) protection of honest debtors; and ii) Safeguarding the interests of creditors by means of equitable distribution of the assets of an insolvent debtor among creditors.

In his book “The Principles of Bankruptcy Law”, Thomson sees the main object of bankruptcy law as; i. To secure an equitable distribution of the property of the debtor among his creditors according to their respective rights against him. ii. To relieve the debtor of his liability to his creditors and to enable him to make a fresh start free from the burden of his debtors and obligations. iii. To protect the interests of the creditors and the public by providing for the investigation of the conduct of the debtor in his affairs, and for the imposition of punishment where there has been fraud or other misconduct on his part.

In Kenya, Bankruptcy is regulated by the Bankruptcy Act (1930), Law of Kenya Cap. 53, revised in 1962. This Act is based largely on the English Bankruptcy Act of 1926.

ACTS OF BANKRUPCY / HOW TO BE BANKRUPT. To be declared bankrupt, it must be proved that you can’t pay your debts, manifested by a commission of an act of bankruptcy.

1. Conveying or assigning all property to a Trustee for the benefit of his creditors generally; Section 3(1) (a) provides that if in Kenya or elsewhere a debtor makes a conveyance or assignment of his property to a trustee or trustees for the benefit of his creditors generally, he commits an act of bankruptcy. To constitute an act of Bankruptcy hearing there must be a

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conveyance or an assignment of the whole or substantially the whole of the debtor’s property. The assignment must be for the benefit of all creditors generally and not just a class. Re Meghji Nathoo (1960) E.A. 560 A creditor who has recognized a Deed of Arrangement wherein a debtor has agreed on a plan of repaying the debt cannot rely on that Deed as an act of bankruptcy.

2. Fraudulent Conveyance: provided for under Section 3(1)(b), this second act of bankruptcy is that if a debtor makes a fraudulent conveyance, gift, delivery or transfer of his property or any part thereof. Under the BA a conveyance is fraudulent if it confers on one creditor an advantage which he would not have under the Bankruptcy Laws or which tends to defeat or delay creditors irrespective of whether the debtor had any dishonest intention although this may be present. The transaction may be “a conveyance, gift, delivery or transfer” of property and this includes mortgages or pledges as well as actual conveyances and assignments. The conveyance need not be for the benefit of any creditor and such transfers are frequently made for example to a member of the debtor’s family. The conveyance need not be of the whole of the debtor’s property.

The principles for determining whether a conveyance is fraudulent under the Bankruptcy Act may be summarized as follows: -- Where a debtor transfers all or virtually all his assets in payment of an antecedent debt without receiving any present return for them this necessarily defeats or delays his other creditors and is a fraudulent conveyance even when the transaction is honestly entered into;- Where a debtor transfers all his assets for a full present consideration this is not per se a fraudulent conveyance since the effect is merely to change the nature of the property to which the creditor look for satisfaction but a fraudulent intent for example to abscond with the proceeds of the sale could be proved if it is in fact existed or it might shown that that so called sale was a sham designed to turn a creditor from an unsecured into a secured creditor at the expense of other creditors and in this latter case that will be fraudulent.- Where a debtor transfer’s part of his assets in payment of an antecedent debt, the fraudulent intent must be proved and this will depend upon whether or not there is sufficient property remaining after the transfer to enable the debtor to continue in business and thus satisfy his other creditors. Secondly this will depend upon whether the debtor is insolvent or not at the time and lastly it will depend upon whether or not the conveyance has the effect of leaving him insolvent.- Where a debtor mortgages or otherwise charges all his property to secure an antecedent debt, this is conclusively presumed fraudulent as against the other creditors.

3. Fraudulent Preference: Section 3 (1) (c) of the BA as read with Section 49(1). If in Kenya or elsewhere he makes any conveyance or transfer of his property or any part thereof or creates any charge thereon which would under the BA or any other Act be void as a fraudulent preference if you are adjudged bankrupt, this constitutes an act of Bankruptcy and basically under Section 49(1) it is provided as follows:“Every conveyance or transfer of property or charge thereon made, every payment made, every obligation incurred and every proceeding taken or suffered by any person unable to pay his debts as they become due from his money in favour of any creditor with a view of giving such creditor guarantor for the debt due to such a creditor a preference over the other creditors is deemed to be

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fraudulent and is void as against the trustee in bankruptcy if the person effecting the transaction is adjudged bankrupt on a petition presented within 6 months after the date of the transaction.

4. Leaving Kenya, Keeping House & Similar Acts, BA Section 3(1) (d) is yet another act of bankruptcy. Here if a debtor departs from Kenya or if out of Kenya remaining outside Kenya or departing from a dwelling house or otherwise absenting himself or beginning to keep house is constituted as an act of bankruptcy.

In order to establish this act of bankruptcy the creditor must prove that it was the debtor’s intention to defeat or delay his creditors but it is not necessary to show that any creditor was actually defeated. The intent may be presumed if it is a natural consequence of the debtor’s act that the creditors will be defeated or delayed.

This ac/t of bankruptcy has 3 limbsa. Departing from or remaining out of Kenya, where a person domiciled in Kenya leaves the country after being pressed for payment by his creditors, there is a strong presumption that his intention is to defeat creditors. However, this is not so if he has a permanent residence abroad at which he remains or if a person domiciled abroad leaves Kenya to return to the country of his domicile. b. The second limb of bankruptcy is departing from a dwelling house or otherwise absenting himself. Here the absenting must be from the debtor’s place of business or usual aboard or from one of more particular creditors elsewhere. It is an act of bankruptcy under this head if a debtor having made an appointment to meet a creditor at a particular place fails to attend to the appointment with intent to defeat it. Refer to the case of Re Worsley (1901) K.B. 309 here where a married woman left her place of business without paying her creditors or notifying her change of address, this was held to be an act of bankruptcy although she left at her husband’s request to live with him elsewhere.c. The third is beginning to keep house _ a debtor keeps house if he refused to allow his creditors to see him or retires to some remote part of his house or business premises where they cannot gain access to him. It must be shown that some creditor has been denied an interview in this way but the creditor must seek the debtor at a reasonable hour.

5. Levying Execution Against Goods, Section 3(1)(e) of the Bankruptcy Act. Where a judgment against a debtor remains unsatisfied, the judgment creditor will usually seek to enforce it by levying execution on the debtor’s goods. This will constitute an act of bankruptcy available to any other creditor if the goods are sold by the Bailiff or retained by them for 21 days excluding the date of seizure. The petition founded on this act must be presented within 3 months thereof. The Bailiff is in possession for the purpose of this section where under a ‘walking possession’ agreement he withdraws his officer upon the debtor’s acknowledging that the goods have been seized and allows the debtor to continue normal trading in the goods provided that a limit is imposed on the value of the goods which can be dealt with in this way by the debtor. If a 3rd party makes a claim to any of the goods seized, the bailiff must take out an inter pleader summons to determine the ownership of the goods. The period occupied in dealing with these summons is not to be counted in the 21 days.

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6. Declaration Of Inability To Pay Debts, BA Section 3 (1) (f) as read with Bankruptcy Rules 98. Here a formal declaration by the debtor that he is unable to pay his debts or a bankruptcy petition presented against himself the latter being the most common constitutes an act of bankruptcy upon delivery of the document to the proper official of the court. A declaration of inability to pay debt is required to be in Form No. 2 of the Bankruptcy Rules while a debtor’s petition is required to be in Form No. 3 of the Bankruptcy Rules.

7. Bankruptcy Notice: Section 4 as read with Section 3(1) g of the BA. Here if the debtor fails to comply with the provisions of a bankruptcy notice, within 7 days, he commits an act of bankruptcy. A bankruptcy notice is a notice issued by the court and served on the judgment debtor calling upon the debtor to pay the amount of the judgment debt or else satisfy the court that he has a counter-claim set-off or cross-demand which equals or exceeds the amount of the judgment debt and which the debtor could not set up in the action in which the judgment was obtained. A bankruptcy notice must be preceded by a request of issue of the notice and this is in Form No. 4 of the Bankruptcy Rules.

A bankruptcy notice must be in the prescribed form and must state the consequences of non-compliance. It can only be issued at the instance of a creditor who has obtained a final judgment in a Kenyan court or foreign court where there is reciprocity. The prescribed form of a bankruptcy notice is Form No. 5 under the Bankruptcy Rules. The period of 7 days for compliance applies where the notice is served in Kenya. If served abroad the court will fix the time for payment in order to give leave to serve it abroad. The notice must require payment to be made in exact accordance with the terms of the judgment. Therefore if by agreement with a creditor payment is to be made by installments, a notice cannot issue on the failure to pay one installment for the whole of the unpaid balance unless it was provided but the whole balance should become due on failure to pay any installment. If a portion of the judgment debt has been paid, there not being any agreement to take payment by installments, the bankruptcy notice must issue for the balance unpaid and not for the whole depth.

But a bankruptcy notice will not be invalidated by reason only that the sums specified in the notice as the amount due exceeds the amount actually due unless the debtor within the time allowed for payment gives notice to the creditor that he disputes the validity of the notice on the ground of such misstatement. If the debtor does not give such notice he is deemed to have complied with the bankruptcy notice if within the time allowed he takes such steps as would have constituted a compliance with the notice had the actual amount due been correctly specified therein. It should be noted that two separate judgment debts cannot be included in one notice.

A bankruptcy notice cannot be issued if execution on the judgment has been stayed. The debtor after service of the notice may seek to have it set aside if he has a counter-claim, set-off or cross-demand which equals or exceeds the amount of the judgment debt and which he could not have set up in the action on which the judgment was obtained or for any other reasons. If the debtor does not successfully challenge the notice and does not pay the debt or provide satisfactory security for it within the specified time he commits an act of bankruptcy which is available not

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only to the creditors issuing the notice but to any other creditor provided that he obtains an affidavit of non-compliance from the creditor issuing the notice.

8. Giving Notice To Creditors Of Suspension Or Intention To Suspend Debts , Section 3(1) (h) BA. Here a statement by a debtor that he has suspended or is about to suspend payment of his debts needs no particular formality but the notice must be given in such a manner as to show that his intention was to give information that he has suspended all those about to receive payment. That will constitute an act of bankruptcy for example notice of Suspension has been inferred where a trader summoned a meeting of his creditors with a view to proposing a composition.

It has also been inferred where a debtor made a verbal statement to the managing clerk of the solicitors acting on behalf of his creditors that he was unable to pay his debts. A notice given “without prejudice” has been held to be admissible as proof of the acts of bankruptcy.

BANKRUPTCY PROCEEDINGSBy section 5 of the Act, if a debtor commits an act of bankruptcy, the court may on a bankruptcy petition being presented by either a creditor or a debtor himself make an order called a receiving order for the protection of the debtor’s estate. Bankruptcy proceedings can thus be initiated by a creditor or a debtor. Where proceedings are initiated by the debtor a petition is sufficient.

However where proceedings are initiated by the creditor the procedure is different. As a creditor you will have to file issuance of a bankruptcy notice. This is done by producing to the registrar a copy of the judgment on which the order is founded.

The person upon whom a declaration of bankruptcy is being sought must reside in Kenya or be within the jurisdiction of the court. You must explicitly state that there is no stay on the judgment.

The Notice will request for immediate payment of the debt unless the debtor can negotiate a settlement with the creditors. The Notice will also state the consequences of failure to abide by the notice.

Under rule 102- It is mandatory of the bankruptcy notice to be served within one month. The debtor can challenge the notice by a statutory form affidavit stating that the debt is settled or by obtaining stay. See also Rule 101. Once it is filed the court sets the matter for hearing. The court will look at the content of the notice, judgment and affidavit. If the court is satisfied it will set aside the order.

After serving the notice, a bankruptcy petition is filed: Bankruptcy petitions are in statutory form. See sections 6 of the Bankruptcy Act i.e monetary

threshold (it could have been amended by now). It can only be founded (i.e the petition) on a liquidated debt. Thirdly, the Act of bankruptcy should have been committed in the last three months.

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Fourthly a petition can only be filed against a debtor domiciled in Kenya. The debtor must have been doing business in Kenya even if it is through an agent. If the debtor has security he has to state it and enter give it up or given an estimate of its value.

Requirement Of A Bankruptcy PetitionSection 6 gives the conditions under which a creditor can give a bankruptcy petition against a debtor. A creditor shall not be entitled to present a bankruptcy petition against the debtor unless:-

i. The debt owed him by the debtor to the petitioning creditor or if two or more creditors join in the petition, the aggregate amount of debts owing to the several petitioning creditors amounts to Ksh. 1000/=. ii. The debt is a liquidated sum payable either immediately or at some future time. iii. The act of bankruptcy on which the repetition is grounded has accrued within 3 months before the presentation of the petition. iv. The debtor is domiciled in Kenya, or within a year before the date of the presentation of the petition has ordinarily resided or had dwelling house, or place of business, or has carried on business in Kenya personally or by means of an agent or manager, or within the said period has been a member of a firm or partnership of person which has carried on business in Kenya by means of a partner or agent or manager. v. No creditor is entitled to rely on a deed of arrangement as a basis for a bankruptcy petition where any law in force relating to deeds or arrangement prohibits him from doing so.

Verification of Bankruptcy PetitionThis is done by an affidavit and it is sworn to by a creditor of someone on his behalf such a person must have full knowledge of the facts deposed to in the affidavit. The petition must ask for a receiving order to be made against a debtor. It must show the address at which the debtor has been carrying on business. It must show the amount of the debt. It must indicate the act of bankruptcy on which the petition is founded, without which the petition is void. Other requirements include;o Clear description of address of debtor.o Secondly, it must be attested by an advocate, justice of the peace, receiver or registrar of the

court. If attested outside Kenya, it might be done by a Judge or notary public.o At the time of filing the petitioner must deposit security for costs. It must be deposited with

the official receiver. File also an affidavit with the petition which is signed by the creditor and one of its directors or partners.

o Once the petition is filed it must be served on the debtor personally or by substituted service.

A debtor can file a response to a petition through challenging it and obtaining stay.

If the petition is not being challenged the creditor can apply to court for the appointment of an official receiver, often a govt. agent as an interim receiver before making the final receiving order.

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Where a petition is filed by the debtor it is heard straight away and makes a receiving order. Under Rule 18, the petition cannot be heard until after 8 days of service of the notice to each party. Even then if the petition is unchallenged a receiving order cannot be made immediately.

A petition can be challenged by the debtor filing notice to show cause stating:o The statement in the petition which he intends to dispute.o The grounds on which he will dispute the statement. See Form 17.

Once the petition is filed it can’t be withdrawn just like that. One must apply for leave to do so.

If the debtor doesn’t enter appearance, the case is heard ex-parte and a receiving order is made. If the debtor enters appearance he is entitled to present witnesses on the ground of his opposition.

Bankruptcy rules: if you don’t appear the matter becomes res judicata and you can’t file on the same Act of Bankruptcy unless you obtain leave to do so.

Hearing Of The PetitionAt the hearing of the petition, the petitioner must:o Prove the debto Prove that an act of bankruptcy has been committed.

While the debtor, in defense, can aver that:o He has paid the debto He is capable of paying the debto He might as well stay proceedings if he can show that the decree has been stayed on the

grounds that it is subject to appeal on application to set aside.

Upon hearing, the court may make a receiving order or dismiss the petition. The court may dismiss this petition if: i. It is not satisfied with the proof of any of requirements. ii. It is satisfied by the debtor that he can pay his debts. iii. It is satisfied that for sufficient course no order should be made.

Receiving OrderIf petition was presented by debtor, a receiving order is made once the petitioning debtor files his statement of affairs with the official receiver.

Where a petition is presented by a creditor, the courts will fix the matter for hearing and make a receiving order if satisfied that an act of bankruptcy has been committed.

A receiving order must state the date of the Act of Bankruptcy and contain a Notice requiring the debtor to attend the official receiver forthwith on the service of the order at the place named on it.

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A receiving order on a debtor’s petition is in Form 26 while an order vide a creditor’s petition is in form 27.

Once the order is made the registrar transmits it to the official receiver.

It is also the duty of the official receiver to advertise in the Kenya Gazzette and in the Daily Press –See Form 29 & 30. The advert must state:i) The name of the debtorii) Residential Addressiii) Descriptioniv) Dates of making of the orderv) Court in which the order was madevi) Date of Petition

See S.26 of the Bankruptcy Act.

Debtor challenging order- he can seek to rescind it on the basis that he has paid the debt in full or that it isn’t due at all. He must issue a 7 day notice to the official receiver. Once the official receiver is served with the application to rescind he is required to fill a report of the debtor’s conduct and affairs. The report is prima facie evidence of the statement made in it. However the court is entitled to hear further evidence adduced by any of the creditors.

Consequences Of The Receving Order- The official receiver becomes the receiver of the debtor’s property. At that time no creditor to whom the debtor is indebted in respect of any debt provable in bankruptcy can have a remedy against the person and property of the debtor as and against the debt.- Once the order is made, no action can be commenced against the debtor’s person of his property without the court’s leave - In special cases the official receiver may allow the creditor to appoint a special manager over the debtors business in place of the official receiver. This normally happens where the nature of the estate is particularly complex. - The receiving order does not make a debtor bankrupt. It doesn’t also deprive him of ownership of his property. It only takes away from him control and possession of his property. - After the receiving orders are made, any transaction entered into by the debtor is invalid regardless of whatever the other party to it has notice of the receiving order.

Proceeding Consequent To A Receiving OrderStatement of affairsThe debtor is required under Section 16 to make out and submit to the official receiver a statement of his affairs. Such a statement is verified by an affidavit showing:

i. Particulars of his assets, debts and liabilities. ii. Names, residences and occupations of his creditors. iii. The securities held by the creditors respectively. iv. Such other information the official receiver may require.

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v. If the debtor himself presented the bankruptcy petition, then he must submit these statements within 3 days before the presentation of the petition.

If on the other hand, the petition was presented by the creditor(s), then the statement must be submitted within 14 days of the date on which the receiving order was made. If he fails to do that, and there is no reasonable excuse for that failure, the debtor is deemed to have committed an offence and shall be guilty of contempt of court and punished accordingly. Furthermore, on the application of the receiver or any creditor, the court may adjudge the debtor bankrupt.

Proof Of DebtOnce a receiving order is made creditors must take steps to prove their debts as soon as possible. This is done by delivering or sending by post to receiver or trustee an affidavit verifying the debt. The affidavit may be signed by the debtor or the authorized agent. It must fulfill the following:o It must refer to the statement of account showing particulars of the debto It should specify vouchers by which the statement can be substantiated.o Where there are vouchers a creditor must be ready to produce them to the receiver or trusteeo The affidavit should state whether you are a secured creditor or not otherwise you stand the

chance of loosing your security altogether.

Proof of Debt Forms are available for viewing to all creditors. A secured creditor can only proof for the balance on the secured debt. Where a creditor seeks to prove the whole amount of the debt he must surrender the security to the Official Receiver or Trustee. If a secured creditor has not surrendered the security, he shall, before ranking for dividends state in his proof the particulars, value and date such security was given. It is only after he has done this that he can receive dividend, the balance due to him after assessing the value due on the security.

It is the duty of the official receiver to admit or reject debts after perusing the affidavit and examining every debt- if he finds no sufficient basis he may reject it. However the Official Receiver’s decision may be appealed by creditors through making an application to court for a review.

Meeting of CreditorsOnce a receiving order is made there are several meetings held for the purpose of considering whether a proposal of a scheme and arrangement or composition is accepted or whether is expedient to declare the debtor bankrupt. These meetings are also held to determine how best to deal with the debtor’s property.

The first meeting of creditors is summoned by the official receiver within 60 days of making of the receiving order. The Notice calling for the meeting is required to be accompanied by summons of debtor’s statement of affairs. The Notice must indicate the time and place of the meeting. Other meetings can be called if necessary. The official receiver is chairman of the 1st meeting later meetings of creditors can be used to appoint the Chairman. It is only creditors who have proved their debts by filing the proof of debt who can vote. A creditor can vote by proxy- he must complete and return to the receiver the requisite forms. There are two types of proxies:

o Special Proxyo General Proxy

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General Proxy allows a proxy to do on behalf of creditors all things in the proceedings. See Form 59.

Special Proxy- Only those specified in it can be done –Form 60.

Quorum of meetings of creditors must be 3 unless their number is less than 3. So for example if there are 9 creditors there must be at least 3 at the meeting.

If meeting is late by half an hour without a quorum it must be called off and it must be recalled within 3 days and in any case within 21 days. The minutes must be recorded.

Public Examination Of DebtorOnce a receiving order is made the official receiver should apply to court for public examination of the debtor. This can only be done after the debtor has supported the statement of affairs. The purpose of this public examination is to see into the debtor’s affairs conduct, dealings and property. A creditor can only participate in such public examination if he has filed a proof of debt form. The creditors will normally question the debtor on his affairs/dealings and cause of failure. The Official Receiver or Trustee and court can question the debtor as well. Examination takes the following format:

Notes of examination are taken in writing and the debtor is allowed to read and sign court proceedings. He is examined under oath.

A debtor who fails to attend Public Examination can be arrested. The official receiver serves the order of P.E to debtor and also to notify creditors. The notice should be published in the Gazette and the Dailies.

The court may dispense with Public Examination if the Debtor is incapacitated, mentally unfit or has a disability which cannot allow him to appear for examination. The debtor can otherwise choose to be examined in another place other than the usual one.

The debtors advocate is allowed to be present but is not allowed to speak.

Composition or Scheme Of Arrangement Once a receiving order has been made and the debtor intends to make a proposal of composition or scheme of arrangement he is required to lodge with the official receiver a written proposal setting out the conditions of his proposal or scheme to be considered by his creditors.

The composition or scheme of arrangement must be lodge within 4 days of the submission of the statement of affairs. The debtor must sign a composition/scheme and set out in it particulars of any security or sureties.

Where there is a proposal the official receiver is required to call a meeting of creditors before conclusion of public examination so that they can decide whether to accept a proposal or not. For

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a proposal for composition see Form 74 and that for a scheme see Form 75. Once the official receiver the proposal he is required to prepare a report on it and that report has a voting letter in the form of Form 76.

The official receiver then sends the report to creditors together with the debtors’ proposal.

Creditors on the voting letter can signify in the voting letter their rejection and then return it to the official receiver at least a day before the meeting. One could also fail to sign the letter and then attend meeting and vote whether to accept or reject the proposal. For a proposal to pass it must gain a majority vote whose value must be ¾ of all creditors who have proved. If this happens its deemed as accepted by all creditors and becomes binding on all of them once it is approved by the court.

Once proposal has been accepted the official receiver or debtor can apply to court to have it approved. Notice of the hearing of the application must be given to all parties concerned.

Once application is made the official receiver should file his report in court about 4 days before the hearing. At the hearing the creditor may still oppose the proposal if new facts emerged after the court’s approval.

The courts decision on application for approval should be gazetted.

Consequence Of Approval Of Scheme By CourtThe official receiver is expected, after paying all costs to put the debtor back in possession of his property. The debtor may opt to appoint a trustee or agent to take possession of his property on his behalf. The concomitant consequence is that the receiving order is discharged.

Any creditor can oppose any approval even if he had voted in favor of it at the meeting of creditors. In deciding whether or not to approve the proposal the court will consider all the facts.

A composition or scheme operates as a contract between debtors and creditors and any party may apply to court to enforce it.

If a debtor defaults on the proposal he risks being adjudged bankrupt and the scheme arrangement annulled. Where the proposal is annulled the debtor’s property will again rest with the official receiver.The court may annul the scheme under the following cases:

i. Where a default is made by the debtor in the payment of any installment due in pursuance of the composition or scheme. ii. If on satisfactory evidence, it appears to the court that the scheme can‟t proceed because of a legal difficulty or for any sufficient cause, without injustice or undue delay to the creditor or debtor. iii. If the court‟s approval was fraudulently obtained.

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A debtor is declared by the court to be bankrupt at the time it makes the order of annulment of the scheme. This doesn‟t however nullify any sale or disposition, or payment made or duly done under the composition or scheme.

ADJUDICATION OF BANKRUPTCYA debtor can only be adjudged bankrupt after receiving order is made and the adjudication of bankruptcy will be made in the following cases. a) Where debtor applies to be adjudged bankrupt. This can be done at the time of making the

receiving order or anytime thereafter. The application need not be formal (there’s no legal requirement of notice), the application can even be made orally in court.

b) Secondly, one will be adjudged bankrupt when he doesn’t attend the 2nd meeting and subsequent meeting of creditors.

c) Where the debtor absconds he will be adjudged bankrupt.d) Where the debtor fails to make any proposal to his creditorse) Where the creditors refuses to accept a composition of scheme at their meeting.f) Where the public examination of the debtor is adjudged sine die (indefinitely). Here the court

may adjudge the debtor bankrupt without notifying him as the debtor fails to cooperate by disclosing his affairs by not attending public examination or even by not complying with any order of the court in relation to his account, dealings and property.

g) Where creditors resolve at their meeting to have the debtor adjudged bankrupt or where they fail to pass any resolution.

h) If a composition of scheme isn’t approved within 14 days of the conclusion of the public examination.

i) If the debtor with the concurrence of the official receiver consents in writing to be adjudged bankrupt.

The order adjudging a person bankrupt should state the period after which the debtor may apply for his discharge.

Effect of adjudication order- Upon adjudication the property of the debtor becomes divisible among creditors and is vested upon the trustee in bankruptcy. - The order of adjudication is under Form 96. The Notice for adjudication of bankruptcy is published in the Kenya Gazette by the official receiver.

Process The trustee in bankruptcy is appointed by creditors by an ordinary resolution or by a committee of inspection. If the person appointed trustee is a person other than an official receiver he is supposed to give security to court before appointment. His appointment is official upon receiving a certificate of appointment from a court

The committee of inspection is appointed by creditors and consists of not more than five people and not less than three who must be creditors of their agent. Its an agency of the creditor to help deal with day to day administration of the debtor’s estate. It meets at least once a month. Even after adjudication they may accept a scheme of arrangement if the decision is approved by court the bankruptcy is annulled and the debtor’s property will revert to him from the trustee.

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A debtor who fails to match up with the scheme or composition will be adjudged bankrupt.

DISCHARGE At the expiration of the time prescribed by the court in the adjudication order the bankrupt is expected to apply to court for discharge. The court will fix a date but the date should be after the conclusion of the Public Examination.

In order to apply for discharge the debtor produces to the registrar a certificate from the official receiver stating the number of creditors that the official receiver has notice, that is, o creditors who have proved, o those not proved but who the official receiver has notice and o those who have had their claim rejected by the official receiver and have appealed.

Once the day of the hearing of the discharge is given, the registrar is required to notify the official receiver and trustee. The Notice must be given at least 28n days before the date of the hearing.

The registrar is required to advertise the hearing 14 days in advance. It is the responsibility of the official receiver to notify creditors at least 14 days in advance. The Official receiver also files his report of the debtors conduct 7 days before the hearing.

If a creditor wishes to challenge the discharge he must file a notice of objection which sets out the grounds upon which he challenges. It must be served 2 days before the hearing.

In dealing with an application for discharge, courts may make the orders of discharge but impose certain conditions on the debtor e.g. In case where there’s a balance of the debts provable in bankruptcy at the time of the

discharge the court may grant a discharge if the debtor gives consent for judgment to be entered against him by the official receiver for the balance. See form 108.

The courts may also grant a conditional discharge requiring the debtor to surrender a portion of future earnings or after acquired property. E.g. if there’s a balance after discharge e.g. 3 million the court can grant him discharge if he agrees to curve off future earnings to the official receiver. See Form 107.

An order for discharge must be gazetted, however this can only be done after the appealing time has elapsed.

DISTRIBUTION OF A DEBTOR’S PROPERTYOnce a debtor is adjudged bankrupt his property vests in the trustee in bankruptcy to be divided among creditors. Certain debts rank in priority to the general ones. In summary the following debts must be paid in priority Taxes due to the government to the government and any rates. These will relate to those that

have accrued within one year before the receiving order is made. Any rents due to the government for the last five years before the receiving order is made

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Wages or salaries of the bankrupt’s employees to be claimed for a maximum of 4 months before making of the receiving order.

Any monies due to the bankrupt’s workmen. Amounts required to be paid by the bankrupt to the NSSF 12 months before making of the

receiving order for the bankrupt’s employees

These debts rank equally and must be paid out in full unless the bankrupt’s property is insufficient to meet them.

After payment of the preferential claims the balance of the debtor’s property will be used to pay the other debts provable in bankruptcy. The debts are to be paid in pari passu (equally). If there is any surplus it is used to pay any interest from the date of the receiving order. If there is any more balance it is paid to the debtor.

Only that property belonging to the debtor is divisible among creditors. Any property held by the debtor on trust cannot be distributed among creditors. The law also exempts debtors’ tools of trade and unnecessary apparel for himself and his immediate family members.

All other property belonging to the debtor or rested in him as the commencement of bankruptcy or acquired and devolved in him before discharge will be subject to distribution among his creditors.

The trustee is expected, after retaining such sums necessary to cover the costs of administration to distribute dividends among creditors who have proved their debts. The bankrupt receives surplus after payment in full of creditors.

Before declaring dividends, a trustee gives 2 months notice of his intention to do so to creditors mentioned in the statement of affairs that haven’t proved their debts. The notice must specify the latest date by which all debts must be proved.

All debts admitted by the official receiver must be provided for. Rejected debts are subject to:o When a creditor has appealed against the official receiver’s decision to reject is proof that

creditor’s debt must be provided for until the appeal is concluded. If the appeal succeeds the creditor will be paid dividend due. If he fails no dividend will be due.

o If a creditor has his debts rejected and he doesn’t appeal his debt won’t be provided for in the process of declaring dividends.

o If a creditor has his debts rejected and he doesn’t appeal his debts won’t be provided for in the process of declaring dividends.

BANKRUPTCY OFFICERS Official Receiver Trustee in Bankruptcy Special Manager

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Official receiverThe official receiver is appointed by the Attorney General (He’s actually a State Counsel) and is assisted by a deputy official receiver. The deputies have equal authority as that vested in the official receiver.

Duties Include: Investigating debtor’s conduct and reporting to the court. Extends to establish whether the debtor has committed an offence under the bankruptcy Act

which will render the court to disqualify a discharge. Public examination of debtor Assist in prosecution of fraudulent debtors Pending the appointment of trustee to act as interim receiver and where a special manager

isn’t appointed to act as one. To authorize special manager to make advances/raise money for the purpose of the estate in

any case where in the interest of the creditors it appears necessary to do so. To summon and preside over the 1st meeting of creditors. To issue forms of proxy for the use at the meeting of creditors To report to creditors of the debtor proposal with respect of liquidating his affairs To advertise the receiving order, the debtors of the 1st meeting of creditors and the public

examination and other matters. To act as trustee during vacancy in the trustee’s office. To admit proofs of debt. To furnish the debtor with instructions for preparation of statement of affairs.

TrusteeThere may be more than one.o Hold the property of the debtoro To make contracts on behalf of he debtoro To sue and be sued on the debtor’s behalf once adjudication is done u can’t sue a debtor in

his own name.o Admission of proof of debts.o Declaring dividendso Distribute debtor’s property among his creditors.

Special ManagerTo manage the estate of the debtor during administration of bankruptcy and where he wants to take important action he must take authority from the official receiver.

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