• CR Advocates LLP
• Finance
• August 9, 2024

Understanding Bankruptcy Laws and Processes in Kenya

INTRODUCTION

Bankruptcy is the legal state where one is unable to meet his or her financial liabilities. This is different from insolvency which the in ability of a debtor is to pay his debts as, and when they are due. This means that one can be insolvent but not bankrupt, but they cannot be bankrupt and not be insolvent. It is good to note that bankruptcy can only be declared by a court of law. The parties involved in bankruptcy are: the debtor i.e.; the person who owes the debt, the creditor(s)i.e.; a person(s) to whom a debt is owed by a debtor, the trustee i.e.; the person(s) in charge of dispersing the property for the benefit of the creditor(s) and the bailiff who is the person in charge of executing all procedures. Bankruptcy proceedings are governed by the Bankruptcy Act, 2015.

The objectives of bankruptcy are; to protect the honest debtor, to safeguard the interests of creditors by means of equitable distribution of the assets of a debtor among his creditors and to bar creditors from harassing a debtor.

UNDERSTANDING CAPACITY IN BANKRUPTY

In general any person capable of entering in a contract may be made bankrupt.

• Minors – It can occur where the infant has entered into a contract for necessaries. The infant will be declared bankrupt only after attaining the age of majority.
• Married women – They are subject to bankruptcy as if they were not married.
• Insane persons – The person may be declared bankrupt if they committed an act of bankruptcy during a lucid moment.
• Partners – A creditor may present a petition of bankruptcy against a partner or he may present a petition against 2 or more partners.
• Deceased persons – Bankruptcy can only be administered if the process had begun before the debtor died.
• Companies and cooperation’s – No bankruptcy petition can be presented against any cooperation or company or association registered under any act. This is due to the fact that they are subject to liquidation or winding up. Contact our team of corporate lawyers in Kenya for a customized advisory.
• Aliens and persons living abroad – A petition may be logged against them in the event that they had a dwelling or any engagements in business directly or through agents, in Kenya within a year.
• Judgement debtor – This is an individual who has been declared bankrupt before and has since been discharged of the bankruptcy. The party may take up a debt like any other party and if they are to commit an act of bankruptcy, then a petition against them may be logged.

ACTS OF BANKRUPTCY IN KENYA

1. Conveying or assigning all property to a trustee for the benefit of a debtors creditors – The conveyance must be of all the debtor’s property or a substantial amount of it.
2. Principles of fraudulent conveyancing – They are centered on the reason that the conveyance, gift, delivery or transfer would give one creditor an advantage that they would not have during bankruptcy proceedings.
3. Fraudulent conveyance – This is a conveyance, gift, delivery or transfer where the debtor undertakes and makes it hard for the creditors to recover their credit.
4. Fraudulent preference – This is where a debtor opts to pay or make arrangements to pay back some creditors and chooses not to do the same for others.
5. Leaving Kenya, keeping house – Here the debtor leaves Kenya or their normal place of dwelling and the creditor has reasonable belief that this move is meant to deny them access to their debt owed.
6. Leaving execution against goods – An order of the court is given against the goods of a debtor as part of the property that is to be used in settlement of his debt.
7. Execution against goods – A 3^rd party comes to claim the goods used in the settlement of the debt as their own. The bailiff must then institute interpleader summons for the court to determine the true owner of the goods.
8. Declaration of inability to pay debt – The debtor on their own accord, declares their in inability to pay the debt or they petition the court for bankruptcy.
9. Bankruptcy notice – It is issued once a debtor is unable to pay the sum that they were required to pay by the court to creditors. The notice is issued by the court detailing the consequence of nonpayment of the debt that is bankruptcy.

Some of the consequences of bankruptcy include; Poor credit i.e.; one cannot get bank loans or take debts, one is prevented from holding a public office, one cannot practice law as an advocate, most of the debtors assets are sold off to offset the debts and the bankrupt person cannot be a director of a company or take part in its management.

It is good to note that the fact that one has been declared bankrupt, does not mean that they will remain bankrupt. One can be discharged from bankruptcy once they have been declared bankrupt for a period of three 3 years. This discharge is automatic or by an application to the court after one (1) year. For the application to be approved by the court there has to be no formal objection from the trustees or creditors.

Once a debtor has been discharged they can undertake any transactions and take part in any other activates that are done by other people. They are referred to as judgement debtors.

CONCLUSION

Bankruptcy is aimed to protect the interests of all parties when it comes to debt repayment. It seeks to ensure that the debtor pays the debt to the best of their ability and that the creditors are compensated in a fair and just manner.

Disclaimer:

“The information provided in this article is intended for general legal advice and does not constitute legal advice for any specific transaction or case. Since each transaction presents a unique legal context, it is advisable to retain a legal adviser for specific transactions.”

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