Bankruptcy Notes Week One To Four-2

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 Creditor is 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
Notes are only for guidance and do not remove the onus on the student to conduct further reading on the course
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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 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.
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.
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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 to
present 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 Trustee for the benefit of his creditors
generally; Section 3(1) (a) provides that if in Kenya or elsewhere a debtor makes a
conveyance or assignment of his property to a trustee or trustees for the benefit of his
creditors generally, he commits an act of bankruptcy. To constitute an act of Bankruptcy
hearing there must be a 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 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 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 BA as read with Section 49(1). If in Kenya or elsewhere he makes
any conveyance or transfer of his property or any part thereof or creates any charge thereon
which would under the BA or any other Act be void as a fraudulent preference if you are
adjudged bankrupt, this constitutes an act of Bankruptcy and basically under Section 49(1) it
is provided as follows:
Every conveyance or transfer of property or charge thereon made, every payment made,
every obligation incurred and every proceeding taken or suffered by any person unable to
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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 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 noncompliance. 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, 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
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 105 a 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 BA provides 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. 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.
Section 13 of the BA as read BR 145 provides 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. Debtors Statement 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) 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.
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 BA provides 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) BA which
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
Page 18
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.A provides 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
Page 19
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 180 185.
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;
Page 20
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.A provides 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:
Page 21
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 197 provides 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.
Page 22
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 the 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

Page 23
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;
Page 24
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 offences 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
Page 25
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.
Page 26
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 33 of BA on the power of the court to annul an adjudication order.
Page 27

Bankruptcy Notes Week One To Four-2

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Bankruptcy Notes Week One To Four-2

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Week One: Definitions and Objectives of the Law of Bankruptcy

Bankruptcy and insolvency

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

a) Was personally present in Kenya; or

Objects of the bankruptcy laws

CAPACITY TO BE SUBJECTED TO BANKRUPTCY PROCEEDINGS I.E WHO

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

4. Aliens & Persons Domiciled Abroad

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

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

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

4. Leaving Kenya, Keeping House & Similar Acts

This act of bankruptcy has 3 limbs

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

5. Levying Execution Against Goods

6. Declaration of Inability to Pay Debts

8. Giving Notice to Creditors of Suspension Or Intention to Suspend Debts

2. The Hearing of the Creditors Petition:

3. Appointment of Interim Receiver:

4. The Receiving Order:

a. The particulars assets, debts and liabilities;

6. The First Meeting of Creditors

7. Composition or schemes of arrangement

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

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

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

8. Public Examination of the Debtor

The power to arrest the debtor

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

If they pass no resolution;

If they do not meet at all;

If the debtor applies to be made Bankrupt;

If the public examination is adjourned sine die;

If a composition of scheme is annulled by the court.

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

10.(a) Disabilities of a Bankrupt

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

10(b). Discharge of a Bankrupt

1. Grant an absolute and immediate discharge;

These facts as contained in Section 29 (3) BA

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

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

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

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

Fraudulent settlement within the context of Section 30 of BA

Effect of Order of Discharge:

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

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