Monday, 2 June 2008

Questions on creditor petition in Bankruptcy

Question: I recently obtained a judgment against a debtor, a Mr

The following questions are thoroughly addressed herein:

  1. What are acts than entitle creditor to pursue bankruptcy proceedings against a debtor?

  2. What conditions must a creditor meet to be entitled to petition in bankruptcy?

  3. Who are the persons who may be adjudged bankrupt in Kenya?

  4. What is the procedure in creditor petitions?


  1. What are 'acts of Bankruptcy'?

The bankruptcy law applicable in Kenya is found in the Bankruptcy Act (Cap. 53 Laws of Kenya) hereinafter the Act. Under section 5 of the Act, if a debtor commits an act of bankruptcy the court may, on bankruptcy petition being presented either by a creditor or by the debtor, make a receiving order.

Generally, the committal of act(s) of bankruptcy by a debtor is what gives a creditor, loosely speaking, the locus standi to lodge a bankruptcy petition against the debtor. What amounts to an act of bankruptcy is provided for under section 3 of the Bankruptcy Act. The subsection 3(1) which provides:

"3. (1) A debtor commits an act of bankruptcy in each of the following cases—

(a) if in Kenya or elsewhere he makes a conveyance or assignment of his property to a trustee or trustees for the benefit of his creditors generally;

(b) if in Kenya or elsewhere he makes a fraudulent conveyance, gift, delivery or transfer of his property, or of any part thereof;

(c) if in Kenya or elsewhere he makes any conveyance or transfer of his property, or of any part thereof, or creates any charge thereon, which would under this or any other Act be void as a fraudulent preference if he were adjudged bankrupt;

(d) if with intent to defeat or delay his creditors he does any of the following things, namely, departs out of Kenya, or being out of Kenya remains out of Kenya, or departs from his dwelling-house, or otherwise absents himself, or begins to keep house;

(e) if execution against him has been levied by seizure of his goods in any civil proceeding in any court, and the goods have been either sold or held by the bailiff for twenty-one days...;

(f) if he files in the court a declaration of his inability to pay his debts or presents a bankruptcy petition against himself;

(g) if a creditor has obtained a final decree or final order against him for any amount, and, execution thereon not having been stayed, has served on him in Kenya, or, by leave of the court, elsewhere, a bankruptcy notice under this Act, and he does not within seven days after service of the notice, in case the service is effected in Kenya, … either comply with the requirements of the notice or satisfy the court that he has a counter-claim, set-off or cross-demand which equals or exceeds the amount of the decree or sum ordered to be paid, and which he could not set up in the action in which the decree was obtained, or the proceedings in which the order was obtained; and for the purposes of this paragraph and of section 4, any person who is, for the time being, entitled to enforce a final decree or final order shall be deemed to be a creditor who has obtained a final decree or final order;

(h) if the debtor gives notice to any of his creditors that he

has suspended, or that he is about to suspend, payment of

his debts. "

  1. What are the condition on which a creditor may petition?

However, section 6 (1) of the Act provides circumstances under which a creditor may not, even despite the committal of an act of bankruptcy by a debtor, be entitled to present a bankruptcy petition against the same debtor.

In essence, for a creditor to be entitled to petition, the following conditions must be met:

  1. The amount owed is not less than 50 pounds or Kshs. 1000 as fixed under the English Bankruptcy Act of 1914;

  1. The debt is a liquidated sum payable either immediately or at some certain future time;

  1. The act of bankruptcy on which the petition is grounded has occurred within 3 months before the presentation of the petition;

  1. 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.

    (iii) Who may be adjudged bankrupt

In general any person capable of entering into a contract may be made bankrupt. Specifically, bankruptcy law applies as stated below to the following special persons:

1. In relation to Infants

Generally, infants are not capable of incurring debts or contracting except contracts for necessaries. Also, infants are not liable in respect of debts that they have incurred. 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 court's consent. See Bankruptcy Rules 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 Act is met in respect of them. That is, if within a year before the date of presentation of the petition the debtor had 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. In alternative, such a person must also have within a year have been a member of a firm or partnership of persons which carried on business in Kenya by means of a partner or partners or an agent or manager.

5. Companies/Corporations

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. But in case of a partnership, a joint petition against the entire partnership instead of a petition for each partner is the way to go.

7. Deceased Persons

There is a provision for administration in bankruptcy of the estate of a deceased person under Section 121 (1) of the Act Section 107 of the Act 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. Judgement Debtor

The Bankruptcy Act 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.

  1. What is the Procedure in creditor's petition?

The following is the step by step procedure of what is needed to start and pursue bankruptcy proceedings up to the petition stage.

Request for issue of Bankruptcy Notice

First and foremost is the request to the High Court on behalf of or by the creditor to issue a Bankruptcy Notice against the debtor. A bankruptcy notice is basically a notice issued by the court and served on the judgement debtor calling upon the debtor to pay the amount of the judgement debt. In alternative to payment, the bankruptcy notice allows the debtor to satisfy the court that he has a counter-claim set-off or cross-demand which equals or exceeds the amount of the judgement debt and which the debtor could not set up in the action in which the judgement was obtained.

As per Rule 99 of the Bankruptcy rules a creditor seeking issue of a bankruptcy notice must produce to registrar of High Court a copy of the judgement or order upon which the notice is founded on. In addition, the creditor must also file tow copies of the notice together with a request to the court issue the notice. A request for issue of the bankruptcy notice is provided for in Form No. 4 of the Bankruptcy Rules.

Bankruptcy Notice

On its part, a bankruptcy notice is to be in the prescribed form and must state the consequences of non-compliance in an endorsement to it. A bankruptcy notice can only be issued at the instance of a creditor who has obtained a final judgement in a Kenyan court. The prescribed form of a bankruptcy notice is Form No. 5 under the Bankruptcy Rules. A period of 7 days for compliance applies where the notice is served in Kenya.

The notice must require payment to be made in exact accordance with the terms of debt. For instance, if the debt is a judgement debt and a portion of it 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 debt.

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. Such an act of bankruptcy is available not only to the creditor issuing the notice but to any other creditor provided the latter obtains an affidavit of non-compliance from the creditor issuing the notice.

The presentation of the Creditor's Petition

Bankruptcy proceedings proper are begun by the presentation of a petition by the debtor himself or by a creditor against the debtor to the High Court registry. This is in accordance with the provisions of Section 5 of the Act. Here, we are interested in creditor petition which is what petition a judgement-creditor can raise. In essence, a petitioning creditor can be any person entitled to enforce payment of a debt or a judgement at law or equity.

The Hearing of the Petition

As per Rule 125 of the Bankruptcy Rules, the hearing of a creditor's 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.

If the debtor wishes to oppose the petition, under rule 128, he must file a notice with the registrar of the court specifying the statements in the petition which he denies. Further he must 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 Rule 126, the petitioning creditor is required to prove the debt. He must also prove service of the petition on the debtor and the act of bankruptcy being relied upon. Thereupon the court may make a receiving order as per section 5 of the Act for the protection of the Estate. If the court is not satisfied with proof 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 Act.

As per Section 7(4) and (5) of Act, 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 judgement or order.

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

Appointment of Interim Receiver

Under section 10 of the Act, 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 also be appointed 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.

Making of the Receiving Order

The making of a receiving order is provided for under section 7(2) of the Act and Rules 138 to 148 of the Bankruptcy Rules. If the court is satisfied with proof of the debt of the petitioning creditor, service of the petition and the act of bankruptcy it may make a receiving order. Upon the making of the receiving order the official receiver becomes receiver of the debtor's property.

The Effect of the receiving Order

As provided in section 9 of the Act, following the receiving order no legal proceedings may be brought for the debt provable in the bankruptcy except by leave of the court. The making of a receiving order does not, however, prejudice a secured creditor's rights to deal with his security.

The receiving order also 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.

Issue of the Notice of the Receiving Order

Section 13 of the Act and Rule 145 of the bankruptcy rules require that 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 to be given. The notice of the receiving order is required to be published in the Kenya Gazette and one of the local daily papers at the instance of the official receiver. In essence, the production of a copy of the Gazette containing the notice of the receiving order is conclusive evidence that the order was duly made on the stated date.

Application for rescission of the receiving order

However, even after the making of the receiving order the debtor may apply for rescission of the receiving order under rules 147 and 148. A notice of the intended application and a copy of the affidavits in support must be duly served on the receiver not less than seven days before the hearing date of the application. The court may make interim orders of stay of the receiving order pending the hearing.

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