bankruptcy notes week one to four-2(1)

7/25/2019 Bankruptcy Notes Week One to Four-2(1)

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Notes are only for guidance and do not remove the onus on the student to conduct further reading on the course Page 1

Week One: Definitions and Objectives of the Law of Bankruptcy

Bankruptcy and insolvency

Bankruptcy is the legal status of an individual against whom an adjudication order has

been made by the court primarily because of his inability to meet his financial liabilities.

Bankruptcy must be distinguished from insolvency which may be defined as the inability

of a debtor to pay his debts as and when they fall due. Whether or not a person is insolvent

is purely a question of fact. Thus a person can be insolvent without being bankrupt. But he

cannot be bankrupt without being insolvent.

An adjudication order in bankruptcy is a judicial declaration that the debtor is insolvent

and has the effect of imposing certain disabilities upon him and of divesting him of his

property for the benefit of his creditors.

A Creditoris any person who is entitled to enforce payment of a debt at law or equity.

A Debtor- The Bankruptcy Act (BA) Section 3(2) defines who a debtor is. It states that a

debtor includes any person whether domiciled in Kenya or not who at the time when any act

of Bankruptcy was done or suffered by him

a) Was personally present in Kenya; or

b)

Ordinarily resided or had a place of residence in Kenya; or

c) Was carrying on business in Kenya personally or by means of an agent or manager or

d) Was a member of a firm or partnership which carried on business in Kenya and

includes a person against whom bankruptcy proceedings have been instituted in a

reciprocating territory and who has property in Kenya

Objects of the bankruptcy laws

Three main objects of bankruptcy laws within the common law jurisdiction have been

identified as follows:

1. To secure an equitable distribution of the property of the debtor among his creditors

according to their respective rights against him


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2. To relieve the debtor of his liability to his creditors and to enable him to make a fresh start

in life freed from the burden of his debts and obligations

3.

To protect the interests of the creditors and the public by providing for the investigation of

the conduct of the debtor in his affairs and for the imposition of punishment where there

has been fraud or other misconduct on his part.

Proffessor Friedman in his book Bankruptcy Law and Practice has given some reasons for the

growth of bankruptcy. He says that the alleviating of the plight of the debtor by a more

merciful though rigorous provision of bankruptcy law has several causes:

1.

The rise in importance of trading on credit and the need to encourage such trading for

commercial purposes thus increasing chances for financial embarrassment for traders

which would make trade more difficult if the harshness of the older law of debt still

remained in force.

2. The change in outlook of society towards those who failed to pay their debts from

regarding them as criminals to looking them only as unfortunate.

3. The need to protect creditors by giving them some relief though not as great as they are

justly entitled to expect rather than punishing the debtor.

4. The benefit to the community as a whole in that (a) the creditors should get something

rather than lose all if the debtor could escape with the assets he has or is imprisoned so as

to be unable to obtain any assets in the future and (b) an opportunity is afford to the debtor

to make a fresh start. Prof. Friedman does assert that the modern law of bankruptcy is a

compromise which is intended to benefit all the parties

CAPACITY TO BE SUBJECTED TO BANKRUPTCY PROCEEDINGS I.E WHO

MAY BE ADJUDGED BANKRUPT

1. Infants/Children


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Generally apart from contracts for necessaries infants are not liable in respect of debts that

they have incurred.

Re Davenport [1913] 2 All E.R. 850

Re A Debtor [1950] Ch. 282

But if an infant fraudulently contracts a debt during his infancy he will be held liable for the

debt and the creditor may claim in bankruptcy on his acquiring the age of majority. This is as

per the Infants Relief Act of England 1874 which is a statute of general application to Kenya.

2. Insane Persons

These are also subject to bankruptcy proceedings. Generally persons of unsound mind cannot

be adjudicated bankrupt without the courts consent. Refer to the Bankruptcy Rule 247.

3. Married Women

Section 117 of the BA provides that every married woman shall be subject to the law relating

to bankruptcy as if she were feme sole.

4. Aliens & Persons Domiciled Abroad

They are also subject to bankruptcy proceedings if Section 6(1) (d)of the B A within a year

before the date of presentation of the petition has ordinarily resided or had a dwelling house

or place of business or has carried on business in Kenya personally or by means of an agent

or manager or is or within that period has been a member of a firm or partnership of persons

which has carried on business in Kenya by means of a partner or partners or an agent or

manager.

5. Companies/Corporations


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Here bankruptcy proceedings are not applicable to companies. These are dealt with under

liquidation and winding up provisions of the Companies Act Cap 486. Section 118of the

BA provides that a Receiving Order shall not be made against any corporation or against

any association or company registered under the Companies Act or any enactment repealed

by that Act. The position in England has been reformed by the Insolvency Act.

6. Partnerships

Whether the partnership is general or limited, it is subject to the provisions of the Bankruptcy

Act. Section 119thereof states as follows subject to such modifications as may be made by

rules under Section 122this Act shall apply to limited partnerships in the same manner as if

limited partnerships were ordinary partnerships and on all the general partners of a limited

partnership. Being adjudged bankrupt the assets of the limited partnership shall vest in the

Trustee in Bankruptcy.

7. Deceased Persons

There is a provision for administration in bankruptcy of the estate of a deceased person under

Section 121 (1) of the BA. Section 107 BAalso enables proceedings already commenced to

continue as if the debtor were alive. Where the debtor is dead a petition may be presented by

his personal representative when its purpose is to obtain an administration order.

8. Judgment Debtor

The BA does not prevent an undischarged bankrupt from creating valid debts and since he

may commit an act of bankruptcy, institution of subsequent bankruptcy proceedings before

he is discharged from a prior bankruptcy is permissible.


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Week Two: Acts of Bankruptcy S. 3(1)(a) to (h)

Acts of Bankruptcy are in effect statutory tests of insolvency. For a creditor/debtor can topresent a Petition in court, he/she must have prima -facie evidence of insolvency on the part

of the debtor. The prima facie evidence is usually furnished by proof that the debtor has

committed an act of Bankruptcy.

A debtor commits an act of bankruptcy in each of the following cases:-

1. Conveying or assigning all property to a Tr ustee for the benefi t 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 conveyance or an assignment or the whole or substantially the whole

of the debtors property. Refer to Re Spackman (1890) 24 QBD 128. The assignment must

be for the benefit of all creditors generally and not just a class. Refer to Re Meghji Nathoo

(1960) E.A. 560 A creditor who has recognised 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. Refer

to Re A Debtor (1939) 2 All E.R. 338

2. Fraudulent Conveyanceprovided for under Section 3(1)(b)of the BA this second act of

bankruptcy is that if a debtor makes a fraudulent conveyance gift delivering 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 debtors family. The

conveyance need not be of the whole of the debtors property.


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The principles for determining whether a conveyance is fraudulent under the Bankruptcy Act

may be summarised as follows: -

a.

Where a debtor transfers all or virtually 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;

b. 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.

c. Where a debtor transfers 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.

d. 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 BAas 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


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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 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 debtors

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 debtors

act that the creditors will be defeated or delayed. Refer to the case of Re Cohen (1950 2 All

ER 36

This act of bankruptcy has 3 limbs

a. 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. Refer to Ex parte Brandon

(1884) 25 Ch. D 500;

b. The second limb of bankruptcy is departing from a dwelling house or otherwise

absenting himself. Here the absenting must be from the debtors 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


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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 husbands request to live with him

elsewhere

c. 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

debtors 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 . Refer to the

case of Re Beeston (1899) 1 QB 626. The Bailiff is in possession for the purpose of this

section where under a walking possession agreement he withdraws his officer upon the

debtors 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. Refer to the case of Re Dalton (1963) Ch. 336.

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.

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 debtors petition is required to be in Form No. 3

of the Bankruptcy Rules.


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7. Bankruptcy Notice

Section 4as 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 instalments, a notice cannot issue on the

failure to pay one instalment for the whole of the unpaid balance unless it was provided but

the whole balance should become due on failure to pay any instalment. If a portion of the

judgment debt has been paid, there not being any agreement to take payment by instalments,

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.


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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 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.

Refer to the case of Crook V. Morley [1891] A.C. 316. 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.

Re a debtor [1929] 1 Ch. 362. A notice given without prejudice has been held to be

admissible as proof of the acts of bankruptcy. In Re Daintrey [1893] 2 Q.B. 116.

Week Three and Four: Bankruptcy Proceedings (S. 7 to S.20 BA, Rule 123 To 185 Br)

1. The Petition:

Section 5 of the BA provides that bankruptcy proceedings are begun by the presentation of

a petition either by the debtor himself or by a creditor against the debtor.

a.

Debtors Petition


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Under Section 8(1) of the BA and BR 105a debtor may present his own petition the filing of

which is deemed to be an act of bankruptcy.

1. The petition must state that the debtor is unable to pay his debt and must request that a

receiving order or an adjudication order be made.

2.

A receiving order is made at once without any hearing in accordance with BR 125.

An adjudication order may also be made at once subject to the debtor having filed

with the official receiver a statement of affairs prepared in accordance with the

provisions of Section 16 of the BA. The petition must further comply with the

provisions of BR 106 to 108.

3. A debtors petition shall not after presentation be withdrawn without leave of the

court.

Hearing of the Debtors Petition

Under BR 125 where a petition is filed by a debtor the court shall forthwith make a

receiving order thereof.

a. Creditors Petition

Any person entitled to enforce payment of a debt at law or equity may be a petitioning

creditor. A creditor may petition if the following conditions are satisfied: pursuant to Section

6 of BA and BR 110

a)

The amount owed is not less than 50 pounds or Kshs. 1000 as fixed under the English

Bankruptcy Act of 1914;

b)

The debt is a liquidated sum payable either immediately or at some certain future

time;

c) The act of bankruptcy on which the petition is grounded has occurred within 3 months

before the presentation of the petition;


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d) The debtor is domiciled in Kenya or within a year before the date of the presentation

or the petition has ordinarily resided or other dwelling house or a place of business in

Kenya or has carried on business in Kenya personally or by means of an agent or

manager or is or within that period has been a member of a firm or partnership of

persons which has carried on business in Kenya by means of a partner or partners or

an agent or manager.

e) The debt due to the petitioning creditor must have existed as a liquidated sum i.e. a

fixed sum or one capable of being computed with certainty at the date of the act of

bankruptcy. It is not sufficient that the debt should have become liquidated at the date

of presentation of the petition if it had in fact been un-liquidated at the earlier debt.

Refer to Re Debtors [1927] 1. Ch. 19 and Mohammed V. Lobo [1953] EACA 117.

Further if a petitioning creditor is a secured creditor, he must in his petition either state that

he is willing to give up his security for the benefit of the creditors in the event of the debtor

being adjudged bankrupt or give an estimate of the value of his security. In the latter case he

may be admitted as a petitioning creditor to the extent of the balance of the debt due to him,

after deducting the value so estimated, in the same manner as if he were unsecured.

S. 7 of BAprovides that the Creditors Petition shall be verified by affidavit of the creditor,

or of the some person on his behalf having knowledge of the facts, and served in the

prescribed form.

2. The Hearing of the Creditors Petition:

The hearing of a creditors petition takes place after the expiration of 8 days from the date of

service thereof on the debtor. But a hearing within the 8 days may be ordered where the

debtor has filed a declaration of inability to pay his debts or where the debtor has absconded

or for any good cause shown.

Under BR 128 if the debtor wishes to oppose the petition he must file a notice with the

registrar of the court specifying the statements in the petition which he denies. Further he


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must also send a copy of the notice to the petitioning creditor 3 days prior to the date of the

hearing.

At the hearing set by the registrar under BR 126 the petitioning creditor must prove:

a. the debt

b.

service of the petition on the debtor

c. the act of bankruptcy being relied on.

Thereupon the court may make a receiving order as per section 5 BA for the protection of the

Estate.

If the court is not satisfied with prove of any of these matters or is satisfied by the debtor that

he is able to pay his debt or that for other sufficient cause no order ought to be made it may

dismiss the petition under Section 7 (3) of the BA.

If the Act of bankruptcy which is being relied upon is non-compliance with a bankruptcy

notice the court may if it thinks fit stay or dismiss the petition if an appeal is pending from

the judgment or order. Section 7(4) as read with 7(5) BA.

The court may also stay all proceedings on the petition if the debtor denies indebtedness to

the petitioner or the amount of the debt until that has been determined. Where proceedings

are stayed the court may if by reason of the delay caused by the stay of proceedings or for

any other cause it thinks just make a receiving order on the petition of some other creditor

and shall thereupon dismiss on such terms as it thinks fit the petition in which proceedings

have been stayed.

A creditor cannot rely upon an act of bankruptcy committed before his debt came into

existence but the debt need not have been due to the petitioning creditor at the date of the act

of bankruptcy. A petition once presented cannot be withdrawn without leave of the court.

3. Appointment of Interim Receiver:


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Under BA Section 10 at any time after the presentation of the petition and before a receiving

order is made the court may if it is shown to be necessary for the protection of the estate

appoint the official receiver to be interim receiver of the property. Under section 12 of B.A

the official receiver may himself appoint a special manager to conduct the business of the

debtor. The court may also stay any action execution or other legal process against the

property or person of the debtor. Refer to BR 119 to 124.

4. The Receiving Order:

Section 9 of the BA as read with BR 138 to 148 . If the court does not dismiss or stay the

petition, it will make a receiving order. Upon the making of the receiving order the official

receiver becomes receiver of the debtors property. Thereafter no legal proceedings may be

brought or the debt provable in the bankruptcy except by leave of the court. Once the official

receiver steps in no proceedings can be brought against the debtor except with the leave of

the court. This however does not prejudice a secured creditors rights to deal with his security

according Section 9(2) as read with Section 6(2) BA.

Note:The receiving order does not make the debtor bankrupt nor does it deprive him of the

ownership of his property. I t is only the possession and control of hi s property that are

taken away from him. Thus any transactions subsequently entered into by the debtor are

prima facie inval id whether or not the other party to the transaction has notice of the

receiving order.

Section 13 of the BA as read BR 145provides that there must be published in the Kenya

Gazette and one of the local daily papers a notice of the receiving order stating the name

address and description of the debtor, the date of the order, the courts by which the order was

made and the date of the petition must be published. The production of a copy of the Gazette

containing any notice of the receiving order is conclusive evidence that the order was duly

made on the stated date. Even after the making of the receiving order the debtor may apply

for its rescission in accordance with BR 147 to 148.

5. DebtorsStatement of Affairs:


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Upon the making of a receiving order the debtor must attend a private interview to determine

how the Estate should be administered and to receive instructions as to the preparation of his

statement of affairs. The debtor must submit his statement of affairs to the official receiver

within 3 days of the receiving order if the order is made on the debtors own petition or

within 14 days or if the order is made on the creditors petition. It may be extended by the

court or official receiver on application of the debtor. BA 16(1) BR 149 to 150. The

statement of affairs must be in the prescribed form verified by Affidavit and must show the

following:

a. The particulars assets, debts and liabilities;

b. The names, residencies and occupations of these creditors;

c.

The securities if any held by them respectively and the dates when they were given

and

d. Such further or other information as may be prescribed or as the official receiver may

require.

Under Section 16(3) BAif the debtor fails without reasonable excuse to comply with these

requirements, the court may on the application of the official receiver or of any creditor

adjudge him bankrupt.

Under Section 16(4) BA any person stating himself in writing to be a creditor of the

bankrupt may personally or by agent inspect the statements of affairs at all reasonable times

and take a copy thereof. But if any person untruthfully states that he is a creditor, then he

shall be guilty of contempt of court and be punished accordingly on the application of the

trustee in bankruptcy or the official receiver.

6. The First Meeting of Creditors

It is provided under section 14 and 15 of the BA as read with the first schedule to the BA.

As soon as may be after the making of the receiving order against a debtor a general meeting

of his creditors referred to as the first meeting shall be held for the purpose of considering

whether a proposal for a composition or scheme of arrangement shall be accepted or whether


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it is expedient that the debtor shall be adjudged bankrupt and generally as to the mode of

dealing with a debtors property with respect to the summoning of and proceedings at the first

and other meetings of creditors the rules in the first schedule to the BA apply.

The official receiver must summon the first meeting of creditors not latter than 60 days after

the date of the receiving order. He must give not less than 6 clear days notice of the time and

place in the Kenya Gazette and in a local daily paper. Furthermore he must send a note to

each creditor mentioned in the statement of affairs. Together with this notice he must also

send a summary of the statement of affairs with comments which he may wish to make as

well as a form of proxy if a composition or scheme of arrangement is to be considered at the

meeting he must send a copy of the scheme and his remarks thereof. Notice must also be sent

to the debtor to attend the meeting.

The official receiver or his nominee shares the meeting. All creditors may attend but a

creditor who has not previously lodged approval of his debt may not vote at the meeting. The

purpose of the meeting is to decide whether the debtor should be adjudged bankrupt or

whether any composition or scheme which he may have submitted should be accepted and in

the former case the creditors may appoint a trustee and a committee of inspection.

7. Composition or schemes of arrangement

This is provided for under section 18 BA and BR 160-169. A composition is an

arrangement between two or more persons for the payment of one to the others of a sum of

money in satisfaction of an obligation to pay another sum differing either in amount or mode

of payment.

A scheme of arrangement is a proposal of dealing with his debts by an insolvent debtor by

applying his assets or income in proportionate payment of them which proposal if agreed by

his creditors or the requisite majority of them. Therefore the scheme or composition is on the

debtors initiative. If the debtor wishes to make a proposal for a composition or for a scheme

of arrangement of his affairs the provisions of section 18 BA come into operation:


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1. He must lodge his proposal with an official receiver within 4 days of submitting his

statement of affairs or within such further time as the official receiver may allow. The

proposal must be in writing and signed by the debtor.

2. The official receiver must summon a meeting of creditors before the public

examination of the debtor is concluded and send to its creditors before the meeting a

copy of the debtors proposal with his report attached thereto.

3. The proposal must be approved by a majority in number and three-quarters in value of

all the creditors who have proved their debts. Creditors may vote by letter in the

subscribed form to the official receiver so as to be received by him not later than the

day preceding the meeting. Creditors who do not vote are regarded as voting against

the resolution.

4.

The debtor may at the meeting amend the terms of his proposal if the amendment is in

the opinion of the official receiver calculated to benefit the general body of creditors.

5. After the proposal is accepted by the creditors it must be approved by the court. Either

the debtor or the official receiver may apply to the court to approve it and three days

notice of the time appoint for hearing the application must be given to each creditor

who has proved his debts.

6.

The application cannot be heard until after the conclusion of the public examination of

the debtor. Before approving the proposal the court must here the report of the official

receiver as to its terms and as to the conduct of the debtor and any objections which

may be made by or on behalf of any creditor. A creditor may oppose the application

not withstanding that he voted for its acceptance at the meeting of creditors.

7. The court must refuse to approve the proposal if in its opinion the terms of the

proposal are unreasonable or not for the benefit of the general body of creditors.

8. In any other case, the court may either approve or refuse to approve the proposal.

9.

Once a composition or scheme is approved by the court it is binding on all creditors

whose debt are proved with the exception unless the creditor accepts the proposal of

those debts from which the debtor will not be released by an order of discharge.

10. If the scheme is approved the receiving order is rescinded and subject to payment of

the official receivers costs, the debt or the trustee under the scheme is put in

possession of the property.

11. The scheme may be annulled in the following cases:

i.

if default is made in payments of any instalments due under the scheme; or


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ii. if it appears to the court that the scheme cannot in consequence of legal

difficulties or for any sufficient cause proceed without injustice or undue delay

to the creditors or the debtor; or

iii. if the consent of the court was obtained by fraud.

iv. If the scheme is annulled the court may adjudge the debtor bankrupt but any

dispositions or payments made under the scheme remain valid.

Section 19 of BA provides that the effect of the composition or scheme is that it is not

binding on any creditor so far as regards a debt or liability from which, under the provisions

of the Act, the debtor would not be released by an order of discharge in bankruptcy, unless

the creditor assents the composition or scheme.

Section 23 of BAprovides that the creditors may also accept a proposal for a composition or

scheme at any time after adjudication. The procedure is the same as in the case of a

composition or scheme accepted before adjudication and upon approving the scheme the

court may annul the adjudication order. Where the adjudication is annulled any assets

remaining after payments to the creditors of the amount owed them under the scheme in

respect of which no order has been made reverts in the debtor.

8. Public Examination of the Debtor

Section 17 BA as read with BR 151-159. Where a receiving order has been made the

official receiver applies to the court for the appointment of a time and place for the public

examination of the debtor. The examination must be held as soon as is convenient after the

expiration of the time for the submission of the debtors statement of affairs. The court may

adjourn it from time to time.

The official receiver must notify the debtor and creditors of the time and place of the

examination and must advertise the order in the Kenya Gazette and in local daily papers. The

public examination may be dispensed with under the provisions of section 17(11) BAwhich

provides that where the debtor is a lunatic or suffers from any such mental or physical

affliction or disability as in the opinion of the court makes him unfit to attend his public

examination, the court may make an order dispensing with the examination or directing that


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the debtor be examined on such terms, in such manner and at such place as to the court seems

expedient.

If the debtor fails without sufficient cause to attend the examination the court may issue a

warrant for his arrest. In this case and also if the debtor fails to disclose his affairs or comply

with an order of court in relation to his affairs the court may adjourn the examination sine die.

It may then adjudge the debtor bankrupt forthwith and he will be unable to obtain discharge

until he can obtain an order of the court for the examination to be continued. Any creditor

who has lodged proof of his debt or his representative authorized in writing may put

questions to the debtor concerning his affairs and causes of his failure.

The official receiver or trustee if one has been appointed and the court take part in the

examination and put questions to the debtor. The debtors advocate may also attend the

examination but not ask any questions or address the court. The debtor is examined on oath

and must answer all questions which the court may put or allow to be put to him. Notes of the

examination are taken down in writing and after being read over to or by the debtor and

signed by him may be used in evidence against him in other proceedings. These notes are

open to the examination of creditors at all reasonable times.

S. 17 (10) of B.Aprovides when the court is of the opinion that the affairs of the debtor have

been sufficiently investigated it makes an order declaring that the examination is concluded

but the order cannot be made until after the day appointed for the first meeting of creditors.

The power to arrest the debtor

Under section 26 BA the court may order the arrest of the debtor and the seizure of any

books, papers or goods in his possession in the following circumstances:

i. If after a bankruptcy notice has been issued or after a petition has been presented by or

against him, there is a probably reason for believing that he has absconded or is about

to abscond without a view to avoiding payment of the debt in respect of which the

bankruptcy notice was issued or avoiding service of a bankruptcy petition or attending

an examination or otherwise delaying or embarrassing the proceedings against him


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ii. The debtor may also be arrested if after presentation of a petition by or against him

there is cause to believe that he is about to remove his goods with a view of prevent or

delaying possession being taken of them by the official receiver or trustee or that there

is ground for believing that he has concealed or he is about to conceal or destroy any of

his goods or any books, documents or writings which might be of use to his creditors

iii.

If after service of a petition or the making of a receiving order he removes any goods in

his possession above the value of five pounds without the leave of the official receiver

or trustee

iv. if without good cause shown he fails to attend any examination ordered by the court.

It should be noted that no arrest is valid upon a bankruptcy notice unless the notice is

servable upon the debt before or at the time of his arrest.

9. Adjudication Order

The adjudication of bankruptcy will take place where the composition is not accepted or

approved. Reference may be made to the BA Section 20 and BR 180185.

When a receiving order has been made the official receiver or any creditor may apply to the

court to adjudge the debtor bankrupt. The court may adjudge the debtor bankrupt in the

following cases:

i.

If the creditors at their first meeting or at any adjournment thereof so resolve by

ordinary resolution;

ii.

If they pass no resolution;

iii.

If they do not meet at all;

iv. If a composition or scheme is not approved within 14 days after the conclusion the

public examination of the debtor or such further time as the court may allow;

v. If the debtor applies to be made Bankrupt;

vi. If a quorum of creditors has not attended the first meeting of creditors or one

adjournment thereof;


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vii. If the court is satisfied that the debtor has absconded or does not intend to propose a

composition or scheme;

viii.

If the public examination is adjourned sine die;

ix. If the debtor without reasonable cause fails to submit his statement of affairs;

x. If a composition of scheme is annulled by the court.

S. 20 (2) of B.Aprovides that upon the making an adjudication order, notice thereof must be

gazetted and advertised in a local paper. The notice must state the name, residential and

business addresses and description of the bankrupt, and the date of the adjudication.

Annulment of the Adjudication Order may be done in the following cases:

i.

If in the opinion of the court the debtor ought not to have been adjudged bankrupt;

ii. If his debts are paid in full;

iii. If a composition or scheme is accepted by the creditors and approved by the court;

The court has a discretion as to annulling the adjudication order and may do so where the

bankrupt has committed bankruptcy offences even if the debts are paid in full. Here a

voluntarily lease by a creditor is not equivalent to payment in full by the debtor.

Under Section 33(b) any debts disputed by the debtor is considered as paid in full if he enters

into a bond in such sum and with such sureties as the court approves to pay the amount to be

recovered in any proceedings for its recovery with costs. Also any debts due to a creditor

who cannot be found or cannot be identified is considered as paid in full if paid into court. it

should be noted that the annulment of an adjudication does not affect the validity of any sales

or dispositions of property or other acts properly done by the official receiver, trustee or any

person acting under their authority or by the court.

The annulment of an adjudication order releases the debtor from the personal disabilities

imposed upon him by the bankruptcy but does not prevent criminal proceedings from being

brought against him for Bankruptcy offences.

10.(a) Disabilities of a Bankrupt

Upon adjudication the bankrupt becomes subject to the following disabilities:


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i. All property belonging to him including property acquired by him prior to his

discharge vests in the trustee in Bankruptcy for distribution among his creditors;

ii. He must not either alone or jointly with any other person obtain credit to the extent of

10 pounds or upwards from any person without informing that person that he is an

undischarged bankrupt; Section 139 (a) BA;

iii. He must not engage in any trade or business under a name other than that under which

he was adjudicated bankrupt without disclosing to all persons with whom he enters

into any business transactions the name under which he was adjudicated Section 139

(b) of the BA;

iv. Under Section 188 of the Companies Act he cannot act as a director or a company or

directly or indirectly take part in the management of a company except by leave of the

court by which he was adjudged bankrupt;

v. He cannot act as a receiver or manager of the property of a company on behalf of the

debenture holders except under appointment made by order of the court;

vi. Under Section 35 (1) (d) of the current Constitution a bankrupt is disqualified from

being a member of parliament or a member of a local authority if elected he will have

to relinquish his seat;

vii.

He cannot act as an advocate under Section 32 of the Advocates Act Cap 16 of the

Laws of Kenya.

10(b). Discharge of a Bankrupt

Section 29 and BR 186 to 197provides that the bankrupt can apply for his discharge at any

time after adjudication but the application cannot be heard until after the public examination

is concluded.


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The registrar of the court must give 28 days notice of the time and place of the Hearing to the

official receiver and the Trustee. The official receiver must forthwith send notice thereof for

gazetting and must give 14 days notice or the Hearing to every creditor. At the hearing or the

application which is held in open court the official receiver submits a report as to the

bankrupts conduct during the proceedings of his bankruptcy. A copy of this report must be

forwarded to the bankrupt not less than 7 days before the hearing and if the bankrupt wishes

to dispute any statement therein, he must notify the official receiver of this fact not less than 2

days before the hearing.

A creditor who wishes to oppose the discharge on any ground other than those mentioned in

the official receivers report must not less than two days before the hearing file in th e court a

written notice of his intended opposition stating the grounds thereof and serve a copy on the

official receiver and the bankrupt.

As provided under section 29 (2) of BA the Courses Available to the Court upon

application is any of the following things:

1.

Grant an absolute and immediate discharge;

2.

Refuse the discharge;

3. Grant an order of discharge subject to conditions with respect to any earnings or

income which may afterwards become due to the bankrupt or with respect to his

after-acquired property;

The court will normally only grant an unconditional absolute discharge where the bankrupt is

entitled to a certificate of misfortune i.e. a certificate of the court to the effect that the

bankruptcy was brought about by causes beyond the debtors control without any misconduct

on his part. This has the effect of releasing the debtor from those statutory disqualifications

which will otherwise attach to him after discharge. There are no cases in which the court is

bound to refuse a discharge but it cannot grant an immediate and conditional discharge.

Where the bankrupt has been convicted of any offence connected with his bankruptcy or

where any of the following facts have been proved against him:

These facts as contained in Section 29 (3) BA


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a. That his assets are not of a value equal to 10 shillings in the pound on the amount of his

unsecured liabilities unless this is due to circumstances for which he cannot justly be

held responsible;

b.

That he has omitted to keep such books of accounts as are usual and proper in the

business carried on by him within 3 years immediately preceding his bankruptcy;

c. That he has continued to trade after knowing himself to be insolvent;

d. That he has contracted any debt provable in the bankruptcy without having at the time

of contracting any reasonable or probable expectation of being able to pay it;

e. That he has failed to account satisfactorily for any loss of assets or for any deficiency of

assets to meet his liabilities;

f. That he has brought on or contributed to his bankruptcy by rash and hazardous

speculations or by unjustifiable extravagance in living or by gambling or by neglect of

his business affairs;

g.

That he has put any of his creditors to unnecessary expense by frivolous or vexatious

defence to any action properly brought against him;

h.

That he has brought on or contributed to his bankruptcy by incurring unjustifiable

expense in bringing a frivolous or vexatious action;

i.

That he has within 3 months preceding the date of the receiving order when unable to

pay his debts as they became due given undue preference to any of his creditors;

j. That he has within 3 months preceding the date of the receiving order incurred

liabilities with a view to making his assets equal to 10 shillings in the pound on the

amount of his unsecured liabilities;


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k. That he has on any previous occasion been adjudged bankrupt or made a composition

or arrangement with his creditors; and

l. That he has been guilty of any fraud or fraudulent breach of trust.

m.

That the Bankrupt has made default in payment of any sum ordered by the Court, under

the provisions of section 55.

Where any such facts or off ences are proved the court may either

i. Refuse the discharge or;

ii. Suspend the discharge for such period as it thinks fit; or

iii.

Suspend the discharge until a dividend of not less than 10 shillings in the pound has

been paid to the creditors; or

iv. Grant a discharge subject to the condition that the bankrupt consents to a judgment

being entered against him for any balance or part of any balance of the debts still

remaining unpaid to be discharge out of his future earnings or after acquired property.

Fraudulent settlement within the context of Section 30 of BA

The court has a similar power where the BANKRUPT has made a settlement of property

before and in consideration of marriage at a time when he was unable to pay his debts

without the aid of such settled property or has contracted in consideration of marriage to

settle on his wife or children property to be subsequently acquired by him and it appears to

the court that the settlement or contract was made in order to defeat or delay creditors or was

unjustifiable having regard to the state of affairs at the time it was made.

Where a bankrupt is discharged unconditionally, it is his duty until the judgment or condition

is satisfied to give the official receiver any information he may require about his earnings or

after acquired property and to file in court an annual statement verified by affidavit giving

particulars of any property or income acquired since discharge.

At any time after the expiration of 2 years from the date of the order, the terms and conditions

of that order may be varied by the court if the bankrupt can satisfy the court that there is no

reasonable probability of his being in a position to comply with them. A discharge bankrupt


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notwithstanding his discharge must continue to give the trustee any assistance he may require

in the realisation and distribution of the estate and if he fails to do so, he is guilty of contempt

of court. The court may also revoke his discharge if it thinks fit but without prejudice to the

validity of any disposition of this property which occurred after the discharge and before its

revocation.

Effect of Order of Discharge:

An order of discharge under Section 32 BA releases the bankrupt from all debts provable in

bankruptcy except the following:

1.

Debts due to the government for breach of a statute relating to any branch of the

public revenue or on a recognizance unless the Permanent Secretary to the

Treasury gives a written consent to his release therefrom;

2. Debts incurred by fraud or fraudulent breach of trust;

3.

Any liability under a judgment against him in an action for seduction or under an

affiliation order or under a Judgment against him as a correspondent in a

matrimonial cause unless the court orders otherwise;

Sec. 32(2) an order of discharge shall release the bankrupt from all other debts provided in

the discharge.

Sec. 32(3) the order shall be conclusive evidence of the bankruptcy and any proceedings that

shall be instituted against bankrupt who has obtained an order of discharge in respect of any

debt from which he is released by the order the bankrupt may plead the cause of action

occurred before his discharge.

Sec. 32(4) An order of discharge does not release any person who at the date of the receiving

order was a partner, co-trustee or surety of the bankrupt. The order releases the bankrupt from

all personal disabilities imposed upon him as a result of the adjudication other than those

which by statute continue to apply for a fixed period after his discharge. He is only released

from this if he obtains a certificate of misfortune. The Order will not however free him from

any liability to be prosecuted for any bankruptcy offences which he may have committed.


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Revocation of discharge

The order of discharge may be revoked or varied at the courts discretion on the following

grounds;

a) Failure by the debtor to give all necessary aid to trustee for realisation of estate, or

b) Failure to file a verified statement or attend court for examination when required or to

answer any questions put to him by the court.

See section 33of BAon the power of the court to annul an adjudication order.

bankruptcy notes week one to four-2(1)

Documents