Assumptions for Bankruptcy

The assumptions for bankruptcy are classified by the doctrine in three, namely,
quality of debtor, legal insolvency and the sentence that decrees bankruptcy. The
quality of debtor is of paramount importance in order for bankruptcy to be decreed.
The Law on Bankruptcy and Recovery of Companies includes this quality so that
the rules that are regulated by it apply (Mungai, 2015). In other words, the law
affects the individual entrepreneur, the individual company with limited liability
and the business corporation, including joint-stock companies, limited
partnerships, limited companies, joint-stock companies and partnerships.
In this way, it is clear that the Insolvency Act, 2015 only applies to those registered
in the register of companies for the relevant categories. Nevertheless, it should be
noted that the law excludes certain economic activities, even if they are registered
in the register, namely: public companies and joint stock companies, public or
private financial institutions, credit cooperatives, consortia, pension plans,
insurance companies, insurance companies, capitalization companies and other
entities legally equivalent to these. With regard to legal insolvency, it can be
justified in three situations: I – the debtor’s timeliness; II – by the failed execution;
III – for Acts of bankruptcy. The sentence that decrees bankruptcy is that it ends
the first phase of bankruptcy, thus declaring the bankruptcy of the debtor. The old
bankruptcy law, provided for only two situations in which bankruptcy was
allowed: claim based on net and certain title (section 1 of the repealed Bankruptcy
Act); and request based on Acts of bankruptcy (section 2 of the the repealed
Bankruptcy Act). With the new law, three situations were determined on which the
decree of bankruptcy is based, namely: the debtor’s timeliness, the execution failed
and the acts of bankruptcy (Langat, 2015).

Insolvency Act 2015

The year 2015 saw the commencment of great changes made especially in the
legislation of insolvency in the country. Thus, the alterations that were made are
purely based on consolidating the relevant laws, rules and regulations that concern
matters of individual and corporate insolvency in depth (Mburu, 2015). The
Insolvency Act, 2015 made two significant changes i.e., procedure about
individual and corporate bankruptcy as well as the facilitation of the procedure for
winding up the corporation in order to protect and increase the benefits of
individuals, creditors and companies. Hence, a number of changes came into
existence, and this incorporates the following terms and conditions especially in
cases involving corporations. Hereby, major amendments relate to the induction of
rights regarding bankruptcy and restructuring procedure of the top management
and administration.

Insolvency Act, 2015 Transition

In Kenya, legal legislation bodies facilitated the enactment of both the Companies
Act, 2015 and the Insolvency Act, 2015 and operationalized them at the same time
in the year 2015. As mentioned above, it is noticed that after enactment it the
relevant Cabinet Secretary (in this case the Attorney General) was given a duration
of nine months to officially notify the changes in both Acts by publishing the
required commencement notices in the Kenya Gazette (Nyaundi, 2015). Therefore,
it is also observed that if the notification regarding modification of both Acts could
not be completed on the given time then it would be necessary for Government to
obtain an extension of the time provided from the National Assembly. The
Insolvency Act, 2015, repealed the Bankruptcy Act and the relevant provisions of
the Companies Act (Cap. 486).
In this Act number of sections and provisions has been repealed in order to make it
modern and successful. In this regard, section 89 of the Law of Succession Act
(Cap. 160) (the Succession Act) is repealed (Kamau, 2015). However, a
transitional section of the Insolvency Act illustrates that apart from the cancellation
of Bankruptcy Act (Cap. 486) and and section 89 of the Succession Act; there is an
existence of relevant provisions of the cancelled parts that is only applicable for
any prior cases or events after the commencement of the Insolvency Act, 2015.
The Cabinet Secretary has enough legislation power to revamp the law by
promulgating such rules and regulations as are necessary to ensure that the
implementation of the Act is smooth and successssful.
According to the Insolvency Act, 2015 it has been noticed that insolvency of the
individual and that of the corporate body should be handled in light of the new Act
(Ongore, 2011). Prior to this version organisation insolvency was mostly dealt
under the “Winding-up provisions of the Companies Act (Cap. 486) (the
Companies Act)”. In contrast to this individual level of insolvency mostly catered
under the Bankruptcy Act (Cap. 53) (the Bankruptcy Act)”. However, the current
version of the Insolvency Act advocates that there must be an option of redemption
regarding company insolvency through proper techniques of administration under
the light of the liquidation aspects. In this latest version of Kenya insolvency law
mostly focusing on the assistance of individual and organisation insolvency where
it has been analysed that the financial position of the entities should be redeemable
and has some capacity to operate in an efficient manner in the future in order to
satisfy the actual financial needs of the customer/creditor. Thus, it is also assumed
that the lending parties would always be entitled to take a forefront position in the
process of liquidation and bankruptcy (Kivuvo, & Olweny, 2014). In this regard,
the basic purpose of this forefront process is to motivate the creditor and protect
the interest of the creditor. In Insolvency Act, therefore, the major concern is to
protect and respect the rights of the creditor who is secured.

Insolvency of Natural Persons

Creditors Application
According to the Insolvency Act section 15 (a) and section 17 the creditor has the
right to file an application in the Court similarly to the process applicable under
section 6 of the now repealed Bankruptcy Act. However, the application of the
Insolvency Act should be extended to the unsecured creditors as it totally depended
on adjudication of debtor bankruptcy, as it is essential to notice the actual factors
and requirements of modification in the light of the Insolvency Act. In the previous
insolvency law for individual persons, a petition of bankruptcy would only be
acceptable when the debtor was resident in Kenya and carried out the business in
Kenya (Koech, et al., 2016). Now this process has been changed according to
section 15(3) because under that section the application can only be acceptable
when the debtor is physically present at the time of application or carried out the
business in a minimum time period of 3 years or was resident in the country on a
temporary basis. However, these modifications have been widened under the scope
of bankruptcy, and this allows the application of bankruptcy to protect the rights of
a creditor or organisation in the light of new Insolvency Act.

Bankruptcy Trustee Power over Charges

According to the Insovency Act, 2015 under section 200 bankruptcy trustees have
an authority to cancel any property charges but this is only in the case when the
charges are created within a year or 2 years before the start of bankruptcy, and the
party is unable to pay the dues. In addition, charges might not cancelled only in a
secure mode of money in which the actual money has been paid in advance
(Omasete, 2014). This mode of transaction ensures the security of the creditor over
the real value of property transferred or sold, or there is any consideration of
valuable goods just to secure the good faith of the creditor. Therefore, such
transactions in which the lending institutions provide money in advance in order to
obtain protection from charges then bankruptcy trustees do not have rights to
cancel the charges.

Option of Secured Creditor in Bankruptcy Event

According to the Insolvency Act, 2015 there are three options that actually protect
the creditor only in the case of issuing the debt for own-selves. There is an
explanation in depth to protect the creditor in the following sections of the
Insolvency Act namely sections 226 and 228. According to these sections there are
certain options for the creditor to get protected in bankruptcy; “realize the charge;
surrender the charge to the bankruptcy trustee for the benefit of creditors; or have
the property valued and prove for the balance due after deducting the amount of
the valuation”. On another hand, according to the “Bankruptcy Act now repealed”
no time frame is mentioned for appropriately ensuring that said options can be
exercised to ensure the security of the creditor (Mboga, 2015). Moreover, the
“Insolvency Act” gives a full right to the bankruptcy trustee to secure the creditor
to hold the charge of any bankrupt property through the above-mentioned options
within the limit of 30 days after the issue of the notice receipt by the trustee. The
basic purpose of “the Insolvency Act” is, therefore, to protect the creditor and
resolve the issue on time within the mentioned new legal framework of the
country.
Herein, there is an option for the creditor to surrender the charge of bankrupt
property to the trustee within the duration of 30 days. Another perspective that is
noticed in this Act is that if the creditor does not take any of the above mentioned
options then the bankruptcy trustee plays its role in order to protect the creditor for
its general benefits. In the latest law on insolvency in Kenya, there are sound
provisions for the creditor in order to protect them which was not the case of in the
previous version (Ongore, 2011). But in the latest applicable insolvency law all the
debt of a lending party should be secured only when the creditor will go for any of
the said options within the time period of 30 days after the release of the notice
from the bankruptcy trustee.

Claim of Interest by the Creditor

According to Insolvency Act, 2015 there are several provisions in order to protect
the creditor in which claim of interest is one of the best option. Creditors have a
sound option for the claiming of interest on the lending amount but this choice is
only valid from the date of the commencement of bankruptcy. In the case of
individual insolvency the debtor has to pay the specific interest rate to the creditor
according to the written contract between both parties (Mutuku, 2011). Moreover,
the debtor has to respect the debt judgment and pay the interest on the specified
agreed rate in accordance with the contract agreement. Under the Insolveny Act,
2015 the bankruptcy trustee allows the creditor to claim the interest rate only if the
surplus assets would remain after the actual valuation of debt.

Court Power Order for Charged Property

Disposal
Under the provisions of the Insolvency Act, 2015 there are number of provisions
that actually secures the interests of the creditor among several options “Disposal
of Charged Property” is considered to be one of the best options. But this totally
dependent upon the decision of the Court regarding the disposal of property
charged. Under section 62, and section 227(1) and (2) are similar to the previous
applicable law and the Court has the power to dispose of the charge over the
property in light of these provisions (Iancu, 2012). Therefore, this rule is only valid
when the Court is fully satisfied on the justification for the sale of property and
release notification for the sale of the property. The Court has power to decide
“when, where, how and by whom the property would be sold”.
In this option, the Insolvency Act, 2015 gives authority to the bankruptcy trustee to
file an application in the Court for the sale of the bankrupt’s property on which the
Court will decide whether it is necessary to sell the property or not. If the decision
goes in the favour of the trustee, then the Court will make an order and give
authority to the trustee to dispose the property when it is not subject of a security
interest (Bernardo, 2012). But in this case satisfaction of the Court is an utmost
feature that has to be met for the disposal of the charged property and this
condition is for the better protecton of the interests of creditors in the case of
bankruptcy.

Bankruptcy Automatic Discharge

According to the previous applicable laws, rules and regulations, there was no
option for the automatic discharge of bankruptcy, in other words the old law (now
repealed) did not provide any time period for the automatic discharge. The
provisions for the automatic discharge or release of bankruptcy are now revamped
in the Insolvency Act, 2015. Under section 254 of the “Insolvency Act 2015”,
there is a valid option for instinctive discharge of the property within the time
period of three years, but this is only expected in light of subsection 2 (Miguens,
2010). According to subsection 2 of section 254 the creditor objection means a lot,
or any objection that comes from the bankruptcy trustee under section 256 of
Insolvency Act. However, there is a statutory limitation of this option and it cannot
be applicable in the case of “fraud or fraudulent breach of trust or amounts payable
under the Matrimonial Causes Act or the Children Act”. In addition, the creditor
expectation should be valid prior to the termination of regulated time period of 3
years. If early bankruptcy discharge has been notified then there is no point of this
clause in the Act (Phelps, & Danning, 2010).

Corporation Insolvency
The Insolvency Act deals with the collective execution of an entrepreneur or
commercial company in a state of insolvency. However, due attention is not given
in the current legislation to the principle of preservation of the company. Since it
deals more with the liquidation of the company’s assets than with its recovery and
maintenance of jobs, with the consequent production of wealth for the country and
distribution of income (Kim, 2012). In addition, the limitation of collective
execution to bankruptcy only to commerce and some types of industry, leaves out
of the benefits in this type of process the service sector, which could use the
extinction of existing obligations before declaration of the breach and the
possibility of rehabilitation in a shorter period of time than occurs in civil
insolvency. Kenya updated its bankruptcy legislation in order to adapt this to the
most advanced laws applicable in the Western nations in the field of insolvency
law, taking into account the principles in force in this area, with the possibility of
satisfying a greater number of creditors and involving them in the process of
company recovery, as there is public interest in maintaining this productive system.

Treatment of Commercial Insolvency in Current

Law
The bankruptcy law in force is based on the decree of bankruptcy in two types of
systems, one of presumptions and another one of fact. In the first hypothesis, the
state of insolvency is presumed, both on the basis of legality. Already in the latter,
there is a confession of commercial entrepreneur regarding insolvency. Moreover,
the common requirement in situations related to the presumption of economic
crisis is that the petitioner proves his status as a creditor, without any limitation as
to the value of the credit (Raeschke-Kessler, 2016). In addition, the above-
mentioned basis of presumption no longer fully meets the needs of the national
business. Bankruptcy in the format in which it is currently structured serves only to
proceed with the liquidation of the subsisting asset, without taking into account the
recovery of the company or its social and economic importance for the community
in which it is located. In addition, bankruptcy is a legal process that also does not
solve the situation of companies in the country, since it is intended to solve the
applicable particular financial crisis, that is, only considering short-term
obligations with suppliers, when it is known that currently the main debts of the
companies are related to tax, labour and bank credits with real guarantees, all of
which are not subject to bankruptcy (Kawalsky, 2012).

Right of Business and New Law

Thus, the definition of a company is disposed with its integrating elements in
section 966 of the Companies Act, that is to say, a person (physical or juridical)
who carries out a professionally organized economic activity. This is intended for
the production or circulation of goods or services for the market for the purposes of
profit and subject to the risks of the particular business, a notion that goes beyond
commercial capitalism and joins the industry (Waxman, 2014). The
aforementioned structural change in the concept of what is a commercial activity
requires a change in the bankruptcy law in order to adapt it to the new sectors of
the economy that have joined the commercial activities obtaining in the country.
For example, those belonging to the third sector, such as real estate.

Change of Focus with Recovery of Company

The recovery of companies is important to change the mentality of the law of
bankruptcy, having as a fundamental scope the principle of preservation of a
company and not only emphasisiiing on proceeding to the liquidation process. It is
necessary to take into account the social and economic importance of the concept
of corporate rescue for a certain region, including labour and technology (Ongore,
2011). Thus, the scope of the recovery is greater than that existing in the current
system, since it takes into account not only the financial crisis but also the
economic crisis, which occurs when equity is negative, that is, in the state of
insolvency. In addition, that law should involve all creditors, from labour, through
the treasury, to the unsecured, not only the latter, as in the legal moratorium, in
order for the creditors to finance the maintenance of that business activity
(Mutuku, 2011). Another positive factor is that the application for a cancellation
can only be formulated from a certain amount, that is, between twenty (20) or forty
(40) minimum salaries in force in the country, depending on the type and size of
the company, and not on the basis of a negligible amount related to a particular
credit, which provisions have been included in the new law.