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.

Lawyer's stock of trade

A lawyer's time and advice are his stock in trade.

-Abraham Lincoln-

L-K’ers: What is your take on this? Email your opinion now to: pmusyimi@gmail.com

When a Lawyer Sends an Account

A doctor and a lawyer were attending a cocktail party when the doctor was approached by a man who asked advice on how to handle his ulcer.

The doctor mumbled some medical advice, then turned to the lawyer and asked, "How do you handle the situation when you are asked for advice during a social function?"

"Just send an account for such advice" replied the lawyer.

On the next morning the doctor arrived at his surgery and issued the ulcer-stricken man a Kshs 50,000/= account. That afternoon he received a Kshs 100,000/= account from the lawyer.

CIVIL SERVANTS CORRESPONDENCE PROTECTED BY PRIVILEGE

Baseline Architects Ltd. & Others v National Hospital Insurance Fund
High Court of Kenya  [2008] eklr [http://www.kenyalaw.org/]
Warsame J  7th May, 2008

This case raised a fundamental problem of balancing or reconciling
two kinds of public interest which may clash due to the stakes
involved. On the one hand there is the public interest that harm
should not be done to the nation or the public by disclosure of
certain documents and on the other hand there is the public interest
that administration of justice should not be frustrated by
withholding of documents which must be produced in evidence if
justice is to be done.

The law is that no one should be compelled to produce documents in
his possession which any other person would be entitled to refuse to
produce if they were in his possession unless there is mutual
consent.

For purposes of public policy and protection, a client may consult
an advocate for the purpose of his cause of action and of litigation
which is pending and that the policy of the law says that in order to
encourage free intercourse between him and his counsel the client has
the privilege of preventing his advocate from disclosing anything
which he gets when so employed and of preventing its being used
against him, although it might otherwise be evidence against him.
This privilege also extends to the Attorney General for he provides
legal opinion and advise to the Government and all public
corporations in areas where his intervention is sought or necessary.

The applicant, the National Hospital Insurance Fund appointed the
2nd respondent as consulting quantity surveyor for a proposed
resource centre in Karen Nairobi. The 1st respondent was also
instructed to be the lead consultant for the design and supervision
to completion of the proposed training centre.

However, a dispute arose between the applicant and the respondents
which was referred to arbitration. Thereafter an award was made and
published in favour of the respondents to the tune of Kshs. 350
million.

NHIF was aggrieved by the decision of the arbitrator they filed the
present application to expunge certain documents from the record.
Reason being that the documents were allegedly privileged.

The applicant, in support of the application, submitted that the
documents annexed to the respondents' affidavits were in breach of
privilege and therefore could not be a basis of adjudication on the
issues before court. The applicant's counsel submitted that the
evidence adduced in the two affidavits was not admissible because the
documents related to an opinion from the Attorney General in respect
of an ongoing litigation or advice given by an advocate to his
client. Counsel submitted that the information was privileged
communication which could not be used against the applicant.

Counsel for the respondents submitted that section 137 and 134 of
the Evidence Act (Cap. 80) permitted the respondents to produce the
evidence on record. He also submitted that the documents produced
were exceptional to the rule of privilege and confidential
information. And that the communication with the Attorney General
fell within the permitted exceptions of section 137 of the Evidence
Act.

The court, after considering counsel submissions, stated that a
party to a litigation is not obliged to produce documents which do
not belong to him but which have been entrusted to his company by a
third party in confidence. It would be an abuse of that confidence to
disclose it, without the permission of the owner of the original
documents.

The court went further to say that where a document has been
communicated voluntarily for a limited and restricted purpose, it
would be unjust and unlawful to allow the original or a copy of it to
be communicated in any manner except for that purpose.

However the court opined in certain cases a possible injury to
public interest must be balanced with another risk which is the
frustration of administration of justice by such refusal.

The documents in question were meant for the internal consumption
and use of the applicant and other Government bodies who would be
concerned or interested in the outcome of the dispute between the
parties. The documents from the Chief Executive Officer of the
applicant to the Attorney General were marked as confidential because
the CEO was seeking an opinion and/or advice of the AG.

The court posed the question whether the documents in question were
within the boundary of documents which any right minded person would
say clearly ought not to be the subject of production in an action.

The court held that it is of utmost importance that public service
should function properly and it cannot do so unless commonplace
communications between one civil servant and another are privileged
from production. It would be an injustice to civil servants to hold
that they are so timid that they would not write freely and candidly
unless they know what they wrote could in no circumstances
whatsoever, come to the light of the day to be used by a person not
intended to see or rely on the contents of such documents.

Public policy requires that the most unreserved communication should
take place between public servants and it should not be subject to
restraints or limitations. But it is quite clear that if the
documents in possession of the respondents was allowed to be
produced, used and relied upon in court, that would in essence
restrain the freedom of communication and render public officers to
proceed in a more cautious, guarded and reserved manner in their
communication and concerns.

The contents of the documents clearly showed that the documents
belonged to a class which on grounds of public interest must, as a
class, be withheld from production. The documents fell within the
scope of privilege and confidential correspondence in the course of
obtaining legal advice. It would be both wrong and dangerous if
parties were allowed to intercept legal opinions between the office
of the Attorney General and government departments and to rely on the
same for the success of their case, because they thought the documents
are favourable to the success of their case.

The balance of public good in the circumstances of this particular
case tilted in favour of refusing the production of the subject
documents.

 Download Case
<http://kenyalaw.org/Downloads_FreeCases/Confidential_communications.pdf>

Reported by BENJAMIN MBATIA of KLR

PRESUMPTION OF MARRIAGE BY COHABITATION

In the matter of the Estate of Patrick Kibunja Kamau(Milka Githikia
Kamau Vs. Faith Wangechi Kamau[2008] eKLR
High Court of Kenya at Nakuru (M.Koome J.),May 16,2008.

 Under kikuyu customary law, there can be marriage by cohabitation,
which could be presumed where parties have been cohabiting together.

 The petitioner, Milka Githikia Kamau, while describing herself as
the widow of the deceased petitioned for the letters of grant of
administration on 12th February 1999. According to her, the deceased
Patrick Kibunja Kamau died on 19th January 1999 at Nyahururu and was
survived by herself (as petitioner) and three minor children.

 The letters of administration were issued to the petitioner on 13th
May 1999. On 7th December 1999 the petitioner applied for the
confirmation of the grant. That is when Faith Wangechi Kamau (the
applicant) filed a protest, of the grant being confirmed, on the
grounds that the deceased was also married to her from 1993. She
contended that she had two children with the deceased who also
survived the deceased. The applicant contended that she was left out
as a widow of the deceased and she protested the confirmation of the
grant unless her name and those of her children were included as
beneficiaries of the deceased. The petitioner Milka Githikia Kamau
however denied any knowledge of the applicant as well as the
children. The petitioner also relied on the evidence of one Elkana
Kibunja, the father of the deceased who denied that the deceased had
married the applicant under the Kikuyu Customary Law since the
applicant was never introduced to him or her children.

 When the matter came up in court, the petitioner gave evidence and
relied on the evidence of her father-in-law Elkana Kibunja and one
Leah Nduta, a step-mother of the deceased. It was the petitioner's
case that she got married to the deceased in 1981 under the Kikuyu
Customary Law and they were blessed with three children. Upon
marriage, the petitioner and the deceased cohabited as husband and
wife in Mombasa, and then moved to Maralal, then Kabarnet District
and finally, Nyahururu.

 The deceased was working with the Ministry of Agriculture and as at
the time he passed away he was the Deputy Provincial Director of
Agriculture based in Nyeri. The deceased is said to have also been
running a business at Subukia town centre where he used to visit
frequently to check on his business but he would always return to
Nyahururu where the petitioner lived with the children. When the
deceased was taken to hospital he was at Subukia and he was admitted
at the Nyahururu Cottage Hospital where he passed away. Upon his
death, meetings to arrange the burial were held at Subukia by friends
and relatives. The funeral committee decided that the death of the
deceased be announced by way of advertisement in the newspapers but
the name of the petitioner or the children were not included. The
petitioner sought an explanation from the deceased's father why they
were left out in the death announcement, Elkana Kibunja held a
meeting with the funeral committee at Subukia and directed that the
names of the petitioner and the applicant as well as any other woman
claiming to be his wife be included in the death announcement. Thus
the name of the petitioner, the applicant and all their children were
included in the death announcement and also in the funeral programme

 The petitioner denied that all the time they lived with the
deceased, the deceased had another wife or that she had met the
applicant or her children. The deceased never disclosed to the
petitioner that he had another wife. The petitioner also vehemently
denied that she had differences with the deceased prior to his death.
She denied that the deceased been separated and was living in a hotel
in Nyahururu instead of the matrimonial home. Asked why the deceased
was taken ill while at Subukia and why the funeral meetings were held
in Subukia instead of the matrimonial home in Nyahururu, the
petitioner explained that the deceased was at his business premises
and it was in Subukia where he had many friends and relatives.

 Elkana Kibunja, deceased father supported the petitioner's evidence
in every material aspect, and so did Leah Nduta, Elkana Kibunja's
wife, and the deceased's step mother

 Faith Wangechi the applicant testified that she met the deceased in
1990. They became friends and he is the biological father of her two
children. The first child was born in 1991 and the second child was
born in 1993. In October 1993, the deceased requested the applicant
to start living with him as a wife. They moved in together, moved to
Subukia and eventually the deceased bought a plot and constructed a
business premises called Village Villas Inn. The applicant was
in-charge of the business and the deceased used to live with her.

 She contended that the deceased married her and paid Kshs.19,000 as
dowry. She contended that she was the one who looked after the
deceased when he was in hospital. According to the applicant, she is
the second wife of the deceased. She recognised the petitioner as the
first wife and urged the court to grant the letters of administration
to the two widows.

 Her evidence was supported by one Peter Chege, a friend of the
deceased who confirmed that she was married to the deceased.

 When the matter came up for determination by the court, the single
issue for determination was whether the applicant and her children
are beneficiaries of the deceased's estate. In particular, whether
the applicant was married to the deceased under the Kikuyu Customary
Law and whether the deceased was the biological father of the
applicant's children or whether he had adopted them under the
Customary Law by virtue of the marriage to the applicant.

 Counsel for the applicant invited the court to find that there was
marriage by cohabitation which could be presumed from the
relationship between the deceased and the applicant.

 The court also needed to establish whether the applicant had been
able to discharge the burden of prove that due to the long
cohabitation living as man and wife with the deceased, the court
should presume a marriage. On the issue of whether her children were
deceased's the court stated that ordinarily if they were the
deceased's children they ought to have borne the names of his
parents. From the evidence on record, the applicant had not proved
that these were deceased's children. No birth certificates were
produced or even evidence to show that the deceased used to support
them.

 The final issue to determine is whether the applicant discharged the
burden of prove that by virtue of the long cohabitation she should be
presumed a wife of the deceased. On this, the court answered the
question on the affirmative. On reaching this answer, the court
considered that the deceased used to live with the applicant at
Subukia from 1993. The deceased personal effects such as clothes and
motor vehicle were retrieved from the applicant's house when the
deceased passed away. It is the applicant who took the deceased to
hospital when he was taken ill. The funeral meetings took place in
Subukia which was recognised as the deceased's residence. The funeral
committee included the applicant as the widow of the deceased and she
was accorded the full honours of a widow. The deceased who was
married to the petitioner under the customary marriage had capacity
to marry the applicant.

 The court was categorical that it would be unconscionable for it to
hold that the applicant was a mere impostor looking out to enrich
herself as the petitioner has described her. All those years the
applicant must have held legitimate expectations that she was the
wife of the deceased and thus entitled to a share of his estate and
that denying her a share of the deceased estate would be tantamount
to denial of the fundamental rights as regards fair treatment and
equality before the law.

 In summation, the court held that the applicant can be presumed a
wife of the deceased. However, her children could not be declared the
beneficiaries of the deceased. The deceased was therefore survived by
the petitioner, the petitioner's three children and the applicant who
was each entitled to 1/5 of the deceased's estate

 Download File
<http://kenyalaw.org/Downloads_FreeCases/succ_82_of_1999.pdf>

 Reported By Timon Kosgei of KLR

 May, 2008

 Nairobi Kenya.