Questions on creditor petition in Bankruptcy

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?

ANSWERS

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. "

2. 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;

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

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

4. 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.

4. 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.

A Refresher on the Basics of Incoterms

Incoterms are internationally accepted commercial terms, developed in 1936 by the International Chamber of Commerce (ICC) in Paris. Incoterms 2000 define the respective roles of the buyer and seller in the agreement of transportation and other responsibilities and clarify when the ownership of the merchandise takes place. These terms are incorporated into export-import sales agreements and contracts worldwide and are a necessary part of foreign trade.

Incoterms are used in union with a sales agreement or other methods of sales transactions and define the responsibilities and obligations of both, the exporter and importer in Foreign Trade Transactions.

The main objectives of Incoterms 2000 revolve around the contract of Foreign Trade concerned with the loading, transport, insurance and delivery transactions. Its main function is the distribution of goods and regulation of transport charges.

Another significant role played by Incoterms is to identify and define the place of transfer and the transport risks involved in order to justify the ownership for support and damage of goods by shipments sent by the seller or the buyer in an event of execution of transport.

Incoterms make international trade easier and help traders in different countries to understand one another. These International Commercial Terms are the most widely used international contracts protected by the ICC copyright.

Incoterms safeguard the following issues in the Foreign Trade contract or International Trade Contract:
 

1. To determine the critical point of the transfer of the risks of the seller to the buyer in the process forwarding of the goods (risks of loss, deterioration, robbery of the goods) allow the person who supports these risks to make arrangements in particular in term of insurance.
   
2. To specify who is going to subscribe the contract of carriage that is to say the seller (exporter) or the buyer (importer).
   
3. To distribute between the seller and the buyer the logistic and administrative expenses at the various stages of the process.
   
4. It is important to define who is responsible for packaging, marking, operations of handling, loading and unloading, inspection of the goods.
   
5. Need To confirm and fix respective obligations for the achievement of the formalities of exportation and importation, the payment of the rights and taxes of importation as well as the sending of the documents. In dealing Foreign Trade there are 13 Incoterms globally adopted by the International Chamber of Commerce.

INTERNATIONAL INCOTERMS

Incoterms or International commercial terms make trade between different countries easier. International Commercial Terms are a series of international trade terms that are used are used worldwide to divide he transaction costs and responsibilities between the seller and the buyer and reflect state-of-the-art transportation practices.

Incoterms directly deal with the questions related to the delivery of the products from the seller to the buyer. This includes the carriage of products, export and import responsibilities, who pays for what and who has the risk for the condition of the products at different locations within the transport process.

Incoterms and world customs Incoterms deal with the various trade transactions all over the world and clearly distinguish between the respective responsibilities of the seller and the buyers.

The 13 International Incoterms are:

Departure of goods by international transport with the risks and dangers to the Seller (Exporter) and Buyers (Importers)

1. "EXW"- Ex Works

   Title and risk pass to buyer including payment of all transportation and insurance cost from the seller's door. Used for any mode of transportation.
   
   Seller : In EXW shipment terms the Seller (Exporter) provides the goods for collection by the Buyer (Importer) on the seller or exporter's promise. Responsibility for the seller is to put the goods, in a good package which is adaptable and disposable by the transport.
   
   Buyer : The buyer or Importer arranges insurance for damage transit goods. The Buyer or importer has to bear all costs and risks involved in shipment transactions.
   
   (However, if the parties wish the seller to be responsible for the loading of the goods on departure and to bear the risks and all the costs of such loading, this should be made clear by adding explicit wording to this effect in the contract of sale. )
   
   

2. "FCA"- Free Carrier named point

   "FCA"- Free Carrier named point: Title and risk pass to buyer including transportation and insurance cost when the seller delivers goods cleared for export to the carrier. Seller is obligated to load the goods on the Buyer's collecting vehicle; it is the Buyer's obligation to receive the Seller's arriving vehicle unloaded.
   
   Seller : The Seller's responsibility is to deliver the goods into the custody of the transporters at defined points. It is important for the chosen place of delivery to have an impact on the obligations of loading and unloading the goods.
   
   Buyer : The Buyer nominates the means of transport or shipping mode and pays the shipment charges.
   
   The seller and the buyer agree upon the place for delivery of goods. If the buyer nominates a person other than a carrier or transporter to receive the goods, the seller is deemed to fulfill his obligation to deliver the goods when they are delivered to that person.
   
   

3. "FAS"- Free Alongside Ship

   FAS- Free Alongside ship: Title and risk pass to buyer including payment of all transportation and insurance cost once delivered alongside ship by the seller. Used for sea or inland waterway transportation. The export clearance obligation rests with the seller.
   
   In FAS has price includes all the costs incurred in delivering the goods alongside the vessel at the port or nominated place of the buyer but there is not applicable charges to the seller for loading the goods on board of vessel and no ocean freight charges and marine insurance.
   
   Seller: The responsibility of the seller are fulfilled when the goods are placed cleared along the ship.
   
   Buyer: Buyer or Importer bear all the expenses and risks of loss or damage of transit goods which are delivered along the ship.
   
   

4. "FOB" - Free On Board

   The FOB (Free on Board) price is inclusive of Ex-Works price, packing charges, transportation charges upto the place of shipment., Seller also responsible for o clear customs dues, quality inspection charges, weight measurement charges and other export related dues. It is important that the shipment term in the Bill of Lading must carry the wording "Shipped on Board' it must bear with signature of transporter or carrier or his authorized representative with the date on which goods were "Boarded".
   
   Seller :Seller responsible for clear customs dues, quality inspection charges, weight measurement charges and other export related dues. It is important that the shipment term in the Bill of Lading must carry the wording "Shipped on Board' it must bear with signature of transporter or carrier or his authorized representative with the date on which goods were "Boarded".
   
   Buyer : The buyer indicates the ship and pays freight, transfer expenses and risks is done when the goods passes or forwarding to the buyers warehouse by rail or ship.
   
   

5. "CFR"- Cost  And Freight

   In this term the exporter bears the cost of carriage or transport to the selected destination port, in this term the risk transferable to the buyers at the port of shipment.
   
   Seller: The chooses the carrier, concludes and bears the expenses by paying freight to the agreed port of destination, unloading not included. The loading of the duty-paid goods on the ship falls on him as well as the formalities of forwarding. On the other hand, the transfer of risks is the same one as in FOB.
   
   Buyer: The buyers supports all the risk of transport, when the goods are delivered aboard by ship at the loading port, buyer receives it from the carrier and takes delivery of the goods from nominated destination port.
   
   

6. "CIF"- Cost, Insurance And Freight

   CIF- Cost, Insurance and Freight: Title and risk pass to buyer when delivered on board the ship by seller who pays transportation and insurance cost to destination port. Used for sea or inland waterway transportation.
   
   This Term involves insurance with FOB price and ocean freight. The marine insurance is obtained by the exporter at his cost against the risk of loss or damage to the goods during the carriage.
   
   Seller: The CFR extends additional obligation to the seller for providing a maritime So insurance against the risk of loss or damage to the goods. The seller pays the insurance premium.
   
   Buyer: He supports the risk of transportation, when the goods have been delivered aboard the ship at the loading port. He takes delivery of the goods from the carrier to the appointed port or destination.
   
   

7. "CPT"- Carriage Paid To

   CPT- Carriage Paid To: Title, risk and insurance cost pass to buyer when delivered to carrier by seller who pays transportation cost to destination. Used for any mode of transportation.
   This term uses land transport by rail, road and inland waterways. The seller and exporter are responsible for the carriage of goods to the nominated destination and have to pay freight up the first carrier.
   
   Seller: The seller or exporter controls the supply chain after paying customs clearance for export. Seller or Exporter select the carrier and pay the expenses up to the destination.
   
   Buyer: The risks of goods damages or loss are supported by the buyer as goods are given by the first carrier. The buyer or importer has to pay importation customs clearance and the unloading costs.
   
   

8. "CIP"- Carriage And  Insurance Paid To

   CIP- Carriage and Insurance Paid To: Title and risk pass to buyer when delivered to carrier by seller who pays transportation and insurance cost to destination. Used for any mode of transportation.
   This term is similar to Carriage Paid To but the seller has to arrange and pay for the insurance against the risk or loss or damage of the goods during the shipment.
   
   Seller: The seller or buyer has to provide insurance and seller pays the freight and insurance premium.
   
   Buyer: The buyer or importer supports the risks of damages or loss, as goods are given to the first carrier. The buyer has to pay customs clearance and unloading charges.
   
   

9. "

   DAF"- Delivered At Frontier

   DAF- Delivered At Frontier: Title, risk and responsibility for import clearance pass to buyer when delivered to named border point by seller. Used for any mode of transportation.
   
   This term is used when the goods are to be carried by rail or road.

   Seller : The seller is responsible to make the goods available to the buyer by the carrier till the customs border as defined in sales contract.
   
   Buyer : The buyer takes delivery of the goods at the contract agreed point border and he is responsible for bearing all customs formalities.

10. DES"- Delivered Ex-Ship

    DES- Delivered Ex-Ship: Title, risk, responsibility for vessel discharge and import clearance pass to buyer when seller delivers goods on board the ship to destination port. Used for sea or inland waterway transportation.
    
    Seller: The seller is responsible to make the goods available to the buyer up to the named quay or after crossing the customs border.
    
    Buyer: The buyer takes delivery of the goods from ship at destination port and pays the expenses of unloading.
    
    

11. DEQ"- Delivered Ex-Quay

    DEQ- Delivered Ex-Quay: Title and risk pass to buyer when delivered on board the ship at the destination point by the seller who delivers goods on dock at destination point cleared for import. Used for sea or inland waterway transportation.
    
    

12. "DDU"- Delivered Duty Unpaid

    DDU- Delivered Duty Unpaid: Seller fulfills his obligation when goods have been made available at the named place in the country of importation.
    
    Seller: The seller is responsible for all transportation cost and accept the customs duty and taxes as per defined in customs procedures.
    
    Buyer: The buyer is responsible of the importation customs formalities.
    
    

13. "DDP"- Delivered Duty Paid

    DDP- Delivered Duty Paid: Title and risk pass to buyer when seller delivers goods to the named destination point cleared for import. Used for any mode of transportation.
    
    Seller: The seller is responsible to make the goods available to the buyer at his risk and cost as promised by the buyer. All the Taxes and duty on importation is promised by the buyer to the seller.
    
    Buyer: The buyer is responsible to take delivery at a nominated place and pays the expenses for unloading of goods.

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I was engrossed in making sense of an international export agreement and I found that knowledge of these basic of incoterms to quite helpful. For more details on incoterms visit:  

www.iccwbo.org/incoterms/