BANKRUPTCY & COMMERCIAL SECURITIES

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1 BANKRUPTCY & COMMERCIAL SECURITIES HISTORICAL REVOLUTION OF BANKRUPTCY LAW 1. Bankruptcy Act Cap 53 Laws of Kenya 2. Ian Macneil Bankruptcy in East Africa 3. Fridman Bankruptcy Law and Practice 4. Thomspson J.H. The principles of Bankruptcy Law 5. Holdsworth on Historical Development Basically the law of bankruptcy has a long history and only a summary of the main developments may be highlighted Summary Act - aimed mainly at securing the property of the debtor for his creditors Act - extended bankruptcy law to none traders. Some land owners had become debtors and had to be catered for by the law Act- to amend and consolidate the existing law was passed. This Act contained many of the substantive bankruptcy law principles which are now in operation today Act -laid the basis of modern Bankruptcy administration & separated the judicial and administrative functions. The judicial functions remained vested in the High Court and County Courts while the administrative functions were transferred to a Board of Trade. It introduced the present day law on the following 1. The public investigation by the Court into the debtor s conduct; 2. Punishment for Bankruptcy offences committed by the bankrupt; 3. strict investigation and prove of debt; 4. General supervision of proceedings including the control of funds and independent audits of trustees accounts.

2 1890 Act laid down the conditions for the discharge of a bankrupt 1913 Act - made offences by Bankrupts punishable summarily and tightened the law as to their criminal liability The Bankruptcy Rules of 1915; The Bankruptcy Amendment Act of 1926; 1940 Act 1. In the English medieval and mercantilist periods the law commences with a statute enacted during the reign of King Henry VIII which largely dealt with fraudulent traders. This legislation was passed in 1542 and it aimed mainly at securing the property of the debtor for his creditors. It did nothing to relieve the debtor of his obligations if his debts exceeded the value of his property. If this occurred the debtor remained liable for the debt and could even be imprisoned for failure to repay. It should be noted that the law was introduced specifically to protect creditors. However, each creditor proceeded against the debtor individually and the debtor s property was acquired on the principle of first come first served. 2. Early bankruptcy law only applied to traders. It should be recalled that this was the mercantilist free trade era of the 16 th and 17 th centuries. The traders complained against the unfairness of the law but their outcry for protection led only to peacemeal reforms and amendments but the punishment of debtors was not alleviated or mitigated in any way. None traders who could not pay their debts were subject to another set of statutes relating to insolvent debtors. 3. In the 18 th and 19 th centuries there was great expansion in the availability of credit. This was the era of the formation of Joint Stock Companies which preceded the modern limited liability companies. Debtors were therefore on the increase. This is as a result of the historical development of capitalism as a mode of production where competition is emphasised culminating in monopoly

3 capitalism hence those who cannot compete within the system fallout and many become debtors. However, it was discovered that people do not become debtors of their own free will. A distinction is sought to be made between dishonest debtors who should be punished and the honest but unfortunate ones who should somewhat be protected. In 1834 the bankruptcy law was extended to none traders. Some land owners had become debtors and had to be catered for by the law. 4. In 1869 an Act to amend and consolidate the existing law was passed. This Act contained many of the substantive bankruptcy law principles which are now in operation today. The broad principle of the Act was that the Bankrupt should be a freed person. He should be freed not only from his debts but also from every possible claim or liability except for personal torts committed by him. On the other hand, all creditors were grouped together for purposes of proceeding against the debtor. The Act also provided for the administration of bankruptcy law and matters in the London Bankruptcy District by Judges of the High Court specially appointed by the Lord Chancellor and in the Counties by County Court Judges. There was no separation between the judicial and administrative functions both of which were exercised by the court. The administration of bankruptcy matters under the 1869 Act did not work well due to the lack of official control over the Trustees in Bankruptcy which was a new office created by the Act in the place of the former system of Official Assignees. In 1883 another Act was passed in England which repealed the 1869 Act and amended and consolidated the law. This is the Act that laid the basis of modern Bankruptcy administration. It separated the judicial and administrative functions. The judicial functions remained vested in the High Court and County Courts while the administrative functions were transferred to a Board of Trade. The 1883 Act also introduced the present day law on the following The public investigation by the Court into the debtor s conduct; Punishment for Bankruptcy offences committed by the bankrupt;

4 strict investigation and prove of debt; General supervision of proceedings including the control of funds and independent audits of trustees accounts. No important reforms were introduced by the Bankruptcy Act of 1890 and the Bankruptcy and Deeds of Arrangement Act of The main reforms made by the 1890 Act was in respect of the conditions for the discharge of a bankrupt. The 1913 Act made offences by Bankrupts punishable summarily and tightened the law as to their criminal liability. The present law of bankruptcy in England is contained in the following:- 1. The Bankruptcy Act of 1940 which was a consolidating Act of Bankruptcy Legislation; 2. The Bankruptcy Rules of 1915; 3. The Bankruptcy Amendment Act of 1926; 4. The Judicial Decisions on the construction of these statutes. However, it is important to note that there have been subsequent developments in England culminating in the enactment of the 1986 Insolvency Act. In Kenya, Bankruptcy is governed by the Bankruptcy Act 1930, the present Chapter 53 of the Laws of Kenya. 1. This Act is largely identical to the English Bankruptcy Act of 1940 and the Bankruptcy Amendment Act of The Bankruptcy Rules are again similar to the English Bankruptcy Rules of 1952 which do not differ significantly from the English bankruptcy rules of Legislation dealing with Deeds of Arrangement is again patterned on the English Act of 1914 and this is the Deeds of Arrangement Act of 1930 which is the current Chapter 54 of the Laws of Kenya; Bankruptcy & Insolvency

5 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 and Adjudication Order in Bankruptcy is a judicial declaration that the debtor is insolvent and it has the effect of imposing certain disabilities upon him and of divesting him of his property for the benefit of his creditors. 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. OBJECTS OF 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; 2. To relieve the debtor of his liability to his creditors and to enable him to make a fresh start in life free 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. Professor Fridman in his book Bankruptcy Law and Practice has given some reasons for the growth of Bankruptcy. He says that the alleviation of the plight of the debtor by a more merciful though rigorous provision of Bankruptcy Law has several causes (a) The rise in importance of trading on credit and the need to encourage such trading for commercial purposes thus increasing chances for

6 financial embarrassment for traders which would make trading more difficult if the harshness of the older law of debt still remained in force; (b) The change in outlook of society towards those who fail to pay their debts from regarding them as criminals to looking at them only as unfortunate; (c) 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; (d) The benefit to the community as a whole in that (i) (ii) 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 In that an opportunity is afforded to the debtor to make a fresh start. Professor Fridman thus asserts that the modern law of bankruptcy is a compromise which is intended to benefit all the parties. UNDERLINED PRINCIPLES (BASIC PRINCIPLES 1. The Debtor must surrender all his properties to the creditors; 2. After payment of a percentage of his liabilities, the debtor may obtain a full discharge from his past debt; 3. The creditors may grant a debtor a discharge even where the debtor pays them less than what is prescribed by the law; 4. The court is the arbitrator in all matters relating to the Bankruptcy; 5. Once discharged, a debtor is freed from his financial obligations and reverts to his former status in society.

7 BANKRUPTCY & SECURITIES Lecture II PROCEEDINGS IN BANKRUPTCY A summary The proceedings in bankruptcy are begun by the presentation to the court of a Bankruptcy Petition. This petition asks the court for a Receiving Order to be made in respect of a debtor s property. The petition may be presented either by the Debtor himself or by a Creditor. If it is presented by a creditor the petition must be founded or based on an alleged act of Bankruptcy which has occurred within 3 months before the presentation of the petition. Indeed the acts of Bankruptcy are in effect statutory tests of insolvency. If it is the debtor himself who presents the petition that in itself constitutes an act of bankruptcy. Upon hearing the petition the court may dismiss it, if it has no merit or make a receiving order if it is found to be with merit. This order does not make the debtor bankrupt all it does is to place his property in safe custody pending the outcome of the proceedings. The first meeting of creditors is then held at which it is determined whether a composition or scheme of arrangement if one is submitted by the debtor shall be accepted or whether application shall be made to the court to adjudicate the debtor bankruptcy. If the court decides to adjudicate the debtor bankrupt it makes an Adjudication Order and the debtor will then become bankrupt. The debtor s property will then vest in his trustee in bankruptcy who will collect in the property and distribute it among those creditors who have proved their debts. The bankrupt must also submit himself to a Judicial Public Examination and at any time after conclusion of this public examination the bankrupt can apply for his Discharge.

8 If the court makes an order of discharge the bankrupt is released from all his debts with certain exceptions provable in bankruptcy and is freed from disabilities against some exceptions which were imposed upon him by the bankruptcy. WHO IS A CREDITOR & WHO IS A DEBTOR A creditor is any person who is entitled to enforce payment of a debt at law or equity. 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) (b) (c) (d) Was personally present in Kenya; or Ordinarily resided or had a place of residence in Kenya; or Was carrying on business in Kenya personally or by means of an agent or manager or 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 WHO MAY BE ADJUDGED BANKRUPT 1. In relation to Infants 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.

9 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 court s consent. Refer to the Bankruptcy Rule 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 as of Section 6(1) (d) of the B A if 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 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 118 of 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.

10 6. Partnerships Whether the partnership is general or limited, it is subject to the provisions of the Bankruptcy Act. Section 119 thereof states as follows subject to such modifications as may be made by rules under Section 122 this 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 BA also 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. THE ACTS OF BANKRUPTCY These are basically covered under Section 3(1) BA. A debtor commits an act of bankruptcy in each of the following cases:- 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

11 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 debtor s 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 Fraudulent Conveyance provided 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 debtor s family. The conveyance need not be of the whole of the debtor s property. BANKRUPTCY & SECURITIES Lecture 3 Fraudulent Conveyance: The principles for determining whether a conveyance is fraudulent under the Bankruptcy Act may be summarised as follows: - 1. 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

12 delays his other creditors and is a fraudulent conveyance even when the transaction is honestly entered into; 2. 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. 3. 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 his insolvent. 4. 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:

13 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 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. Refer to the case of Re Cohen ( 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 part Brandon (1884) 25 Ch. D 500

14 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. 3 rd Limb b. 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. 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 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. Refer to the case of Re Dalton (1963) Ch. 336.

15 EXECUTION AGAINST GOODS. If a 3 rd 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 B A 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 a bankruptcy notice is Form No. 5 under the Bankruptcy Rules. The period of 7

16 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. 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, setoff 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

17 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 suspend 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 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 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 Bankruptcy & Commercial Securities-Lecture 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 it is expedient that the debtor shall be adjudged bankrupt and generally as to the mode of dealing with a debtor s 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

18 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. Composition or scheme of arrangement This is provided for under section 18 BA and BR 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 debtor s 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: 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 debtor s 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

19 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 propose. 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 receiver s 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

20 (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. If the scheme is annulled the court may adjudge the debtor bankrupt but any dispositions or payments made under the scheme remain valid. 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. Public Examination of the Debtor Section 17 Bankruptcy Act as read with BR 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 debtor s 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 a local daily papers. The public examination may be dispensed with under the provisions of section 17n(11) BA. 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

21 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 debtor s 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 by the creditors at all reasonable times. 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: 1. 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 with 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 2. 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

22 3. 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 4. 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 debtor before or at the time of his arrest. BANKRUPTCY & SECURITIES Lecture IV PROCEDURE OF ADJUDICATION A. The Petition: As noted earlier bankruptcy proceedings are begun by the presentation of a petition by the debtor himself or by a creditor against the debtor. This is in accordance with the provisions of Section 5 of the BA. Petition of Debtor against himself: Under Section 8(1) of the Bankruptcy Act and Bankruptcy Rules 105 a debtor may present his own petition. 1. The filing of which is deemed to be an act of bankruptcy. 2. 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. 3. A receiving order is made at once without any hearing in accordance with BR 125. An adjudication order may also be made at once. 4. The debtor must file with the official receiver a statement of affairs prepared in accordance with the provisions of Section 16 of the BA. 5. The petition must further comply with the provisions of BR 106 to 108. A debtor s petition shall not after presentation be withdrawn without leave of the court.

23 2. Creditor s 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: 1. Pursuant to Section 106 Bankruptcy Act and Bankruptcy Rules 110 (a) The amount owed is not less than 50 pounds or Kshs 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; (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. 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 The Hearing of the Petition:

24 Bankruptcy Rules Under BR 125 where a petition is filed by a debtor the court shall forthwith make a receiving order thereof. 1. The hearing of a creditor s petition takes place after the expiration of 8 days from the date of service thereof on the debtor. 2. 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. OPPOSITION BY THE DEBTOR. 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 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: 1. The debt. 2. Service of the petition on the debtor. 3. 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. DISMISSAL OF THE PETITION 1. 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.

25 2. If the Act of bankruptcy which is being relied upon is non-compliant 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 indebtness 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: 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. 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 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 debtor s property. Thereafter no legal proceedings may be brought or the debt provable in the

26 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 creditor s rights to deal with his security according Section 9(2) as read with Section 6(2) BA. The receiving order does not make the debtor bankrupt nor does it deprive him of the ownership of his property. It is only the possession and control of his property that are taken away from him. Thus any transactions subsequently entered into by the debtor are prima facie invalid whether or not the other party to the transaction has notice of the receiving order. The 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 in the Kenya Gazette and one of the local daily papers. Section 13 of the BA as read BR 145. 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 Debtor s Statement of Affairs: 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 debtor s own petition or within 14 days or if the order is made on the creditor s 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 of assets, debts and liabilities;

27 (b) (c) (d) The names, residencies and occupations of the creditors; The securities if any held by them respectively and the dates when they were given and Such further or other information as may be prescribed or as the official receiver may require. Under Section 16(3) BA if 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. 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. Bankruptcy & Commercial Securities Lecture 7 THE ADJUDICATION ORDER Reference may be made to the BA Section 20 and BR The grounds for Making an Adjudication Order 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: 1. If the creditors at their first meeting or at any adjournment thereof so resolve by ordinary resolution; 2. If they pass no resolution; 3. If they do not meet at all;

28 4. If a composition or scheme is not approved within 14 days after the conclusion of the public examination of the debtor or such further time as the court may allow; 5. If the debtor applies to be made Bankrupt; 6. If a quorum of creditors has not attended the first meeting of creditors or one adjournment thereof; 7. If the court is satisfied that the debtor has absconded or does not intend to propose a composition or scheme; 8. If the public examination is adjourned sine die; 9. If the debtor without reasonable cause fails to submit his statement of affairs; 10. If a composition of scheme is annulled by the court. Upon the making of an adjudication order, notice thereof must be gazetted and advertised in a local paper. Annulment of the Adjudication Order: The adjudication order may be annulled in the following cases: 1. If in the opinion of the court the debtor ought not to have been adjudged bankrupt; 2. If his debts are paid in full; 3. 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

29 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. DISABILITIES OF A BANKRUPT Upon adjudication the bankrupt becomes subject to the following disabilities: 1. 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; 2. 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; 3. 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; 4. Under Section 188 of the Companies Act he cannot act as a director of 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; 5. 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; 6. 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;

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