BANKRUPTCY & COMMERCIAL SECURITIES

HISTORICAL REVOLUTION OF BANKRUPTCY LAW

1. Bankruptcy Act Cap 53 Laws of Kenya

2. Ian Macneil Bankruptcy in East Africa

3. Fridman Bankruptcy Law and Practice

4. Thomspson J.H. The principles of Bankruptcy Law

5. Holdsworth on Historical Development

Basically the law of bankruptcy has a long history and only a summary of the main

developments may be highlighted

Summary.

1542 Act - aimed mainly at securing the property of the debtor for his creditors.

1834 Act - extended bankruptcy law to none traders. Some land owners had become

debtors and had to be catered for by the law.

1869 Act- to amend and consolidate the existing law was passed. This Act contained many

of the substantive bankruptcy law principles which are now in operation today.

1883 Act -laid the basis of modern Bankruptcy administration & separated the judicial and

administrative functions. The judicial functions remained vested in the High Court and

County Courts while the administrative functions were transferred to a Board of Trade. It

introduced the present day law on the following

1. The public investigation by the Court into the debtors conduct;

2. Punishment for Bankruptcy offences committed by the bankrupt;

3. strict investigation and prove of debt;

4. General supervision of proceedings including the control of funds

and independent audits of trustees accounts.

1890 Act laid down the conditions for the discharge of a bankrupt

1913 Act - made offences by Bankrupts punishable summarily and tightened the law as to

their criminal liability.

1915 - The Bankruptcy Rules of 1915;

1926 - The Bankruptcy Amendment Act of 1926;

1940 Act

1. In the English medieval and mercantilist periods the law commences with a

statute enacted during the reign of King Henry VIII which largely dealt with

fraudulent traders. This legislation was passed in 1542 and it aimed mainly at

securing the property of the debtor for his creditors. It did nothing to relieve the

debtor of his obligations if his debts exceeded the value of his property. If this

occurred the debtor remained liable for the debt and could even be imprisoned

for failure to repay. It should be noted that the law was introduced specifically

to protect creditors. However, each creditor proceeded against the debtor

individually and the debtors property was acquired on the principle of first

come first served.

2. Early bankruptcy law only applied to traders. It should be recalled that this was

the mercantilist free trade era of the 16th and 17th centuries. The traders

complained against the unfairness of the law but their outcry for protection led

only to peacemeal reforms and amendments but the punishment of debtors was

not alleviated or mitigated in any way. None traders who could not pay their

debts were subject to another set of statutes relating to insolvent debtors.

3. In the 18th and 19th centuries there was great expansion in the availability of

credit. This was the era of the formation of Joint Stock Companies which

preceded the modern limited liability companies. Debtors were therefore on the

increase. This is as a result of the historical development of capitalism as a

mode of production where competition is emphasised culminating in monopoly

capitalism hence those who cannot compete within the system fallout and many

become debtors. However, it was discovered that people do not become debtors

of their own free will. A distinction is sought to be made between dishonest

debtors who should be punished and the honest but unfortunate ones who

should somewhat be protected. In 1834 the bankruptcy law was extended to

none traders. Some land owners had become debtors and had to be catered for

by the law.

4. In 1869 an Act to amend and consolidate the existing law was passed. This Act

contained many of the substantive bankruptcy law principles which are now in

operation today. The broad principle of the Act was that the Bankrupt should be

a freed person. He should be freed not only from his debts but also from every

possible claim or liability except for personal torts committed by him. On the

other hand, all creditors were grouped together for purposes of proceeding

against the debtor. The Act also provided for the administration of bankruptcy

law and matters in the London Bankruptcy District by Judges of the High Court

specially appointed by the Lord Chancellor and in the Counties by County

Court Judges. There was no separation between the judicial and administrative

functions both of which were exercised by the court. The administration of

bankruptcy matters under the 1869 Act did not work well due to the lack of

official control over the Trustees in Bankruptcy which was a new office created

by the Act in the place of the former system of Official Assignees.

In 1883 another Act was passed in England which repealed the 1869 Act and amended and

consolidated the law. This is the Act that laid the basis of modern Bankruptcy

administration. It separated the judicial and administrative functions. The judicial

functions remained vested in the High Court and County Courts while the administrative

functions were transferred to a Board of Trade. The 1883 Act also introduced the present

day law on the following

The public investigation by the Court into the debtors conduct;

Punishment for Bankruptcy offences committed by the bankrupt;

strict investigation and prove of debt;

General supervision of proceedings including the control of funds and

independent audits of trustees accounts.

No important reforms were introduced by the Bankruptcy Act of 1890 and the Bankruptcy

and Deeds of Arrangement Act of 1913. The main reforms made by the 1890 Act was in

respect of the conditions for the discharge of a bankrupt. The 1913 Act made offences by

Bankrupts punishable summarily and tightened the law as to their criminal liability.

The present law of bankruptcy in England is contained in the following:-

1. The Bankruptcy Act of 1940 which was a consolidating Act of Bankruptcy

Legislation;

2. The Bankruptcy Rules of 1915;

3. The Bankruptcy Amendment Act of 1926;

4. The Judicial Decisions on the construction of these statutes.

However, it is important to note that there have been subsequent developments in England

culminating in the enactment of the 1986 Insolvency Act. In Kenya, Bankruptcy is

governed by the Bankruptcy Act 1930, the present Chapter 53 of the Laws of Kenya.

1. This Act is largely identical to the English Bankruptcy Act of 1940 and the

Bankruptcy Amendment Act of 1926.

2. The Bankruptcy Rules are again similar to the English Bankruptcy Rules of

1952 which do not differ significantly from the English bankruptcy rules of

1915.

3. Legislation dealing with Deeds of Arrangement is again patterned on the

English Act of 1914 and this is the Deeds of Arrangement Act of 1930 which is

the current Chapter 54 of the Laws of Kenya;

Bankruptcy & Insolvency

Bankruptcy is the legal status of an individual against whom an adjudication order has been

made by the court primarily because of his inability to meet his financial liabilities and

Adjudication Order in Bankruptcy is a judicial declaration that the debtor is insolvent and it

has the effect of imposing certain disabilities upon him and of divesting him of his property

for the benefit of his creditors.

Bankruptcy must be distinguished from insolvency which may be defined as the inability of

a debtor to pay his debts as and when they fall due. Whether or not a person is insolvent is

purely a question of fact thus a person can be insolvent without being bankrupt but he

cannot be bankrupt without being insolvent.

OBJECTS OF BANKRUPTCY LAWS

Three main objects of Bankruptcy Laws within the common law jurisdiction have been

identified as follows:

1. To secure an equitable distribution of the property of the debtor among his

creditors according to their respective rights against him;

2. To relieve the debtor of his liability to his creditors and to enable him to make a

fresh start in life free from the burden of his debts and obligations;

3. To protect the interests of the creditors and the public by providing for the

investigation of the conduct of the debtor in his affairs and for the imposition of

punishment where there has been fraud or other misconduct on his part.

Professor Fridman in his book Bankruptcy Law and Practice has given some reasons for

the growth of Bankruptcy. He says that the alleviation of the plight of the debtor by a

more merciful though rigorous provision of Bankruptcy Law has several causes

(a) The rise in importance of trading on credit and the need to encourage

such trading for commercial purposes thus increasing chances for

financial embarrassment for traders which would make trading more

difficult if the harshness of the older law of debt still remained in force;

(b) The change in outlook of society towards those who fail to pay their

debts from regarding them as criminals to looking at them only as

unfortunate;

(c) The need to protect creditors by giving them some relief though not as

great as they are justly entitled to expect rather than punishing the

debtor;

(d) The benefit to the community as a whole in that

(i) The creditors should get something rather than lose all if the debtor

could escape with the assets he has or is imprisoned so as to be unable to

obtain any assets in the future and

(ii) In that an opportunity is afforded to the debtor to make a fresh start.

Professor Fridman thus asserts that the modern law of bankruptcy is a compromise which is

intended to benefit all the parties.

UNDERLINED PRINCIPLES (BASIC PRINCIPLES

1. The Debtor must surrender all his properties to the creditors;

2. After payment of a percentage of his liabilities, the debtor may obtain a full

discharge from his past debt;

3. The creditors may grant a debtor a discharge even where the debtor pays them

less than what is prescribed by the law;

4. The court is the arbitrator in all matters relating to the Bankruptcy;

5. Once discharged, a debtor is freed from his financial obligations and reverts to

his former status in society.

BANKRUPTCY & SECURITIES Lecture II

PROCEEDINGS IN BANKRUPTCY

A summary

The proceedings in bankruptcy are begun by the presentation to the court of a Bankruptcy

Petition. This petition asks the court for a Receiving Order to be made in respect of a

debtors property. The petition may be presented either by the Debtor himself or by a

Creditor. If it is presented by a creditor the petition must be founded or based on an alleged

act of Bankruptcy which has occurred within 3 months before the presentation of the

petition. Indeed the acts of Bankruptcy are in effect statutory tests of insolvency.

If it is the debtor himself who presents the petition that in itself constitutes an act of

bankruptcy. Upon hearing the petition the court may dismiss it, if it has no merit or make a

receiving order if it is found to be with merit. This order does not make the debtor

bankrupt all it does is to place his property in safe custody pending the outcome of the

proceedings.

The first meeting of creditors is then held at which it is determined whether a composition

or scheme of arrangement if one is submitted by the debtor shall be accepted or whether

application shall be made to the court to adjudicate the debtor bankruptcy. If the court

decides to adjudicate the debtor bankrupt it makes an Adjudication Order and the debtor

will then become bankrupt. The debtors property will then vest in his trustee in

bankruptcy who will collect in the property and distribute it among those creditors who

have proved their debts.

The bankrupt must also submit himself to a Judicial Public Examination and at any time

after conclusion of this public examination the bankrupt can apply for his Discharge.

If the court makes an order of discharge the bankrupt is released from all his debts with

certain exceptions provable in bankruptcy and is freed from disabilities against some

exceptions which were imposed upon him by the bankruptcy.

WHO IS A CREDITOR & WHO IS A DEBTOR

A creditor is any person who is entitled to enforce payment of a debt at law or equity. The

Bankruptcy Act (BA) Section 3(2) defines who a debtor is. It states that a debtor includes

any person whether domiciled in Kenya or not who at the time when any act of Bankruptcy

was done or suffered by him

(a) Was personally present in Kenya; or

(b) Ordinarily resided or had a place of residence in Kenya; or

(c) Was carrying on business in Kenya personally or by means of an agent or

manager or

(d) Was a member of a firm or partnership which carried on business in Kenya and

includes a person against whom bankruptcy proceedings have been instituted in

a reciprocating territory and who has property in Kenya

WHO MAY BE ADJUDGED BANKRUPT

1. In relation to Infants

Generally apart from contracts for necessaries infants are not liable in respect of debts that

they have incurred.

Re Davenport [1913] 2 All E.R. 850

Re A Debtor [1950] Ch. 282

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 courts consent. Refer to the Bankruptcy 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 as of Section 6(1) (d) of the B A if within

a year before the date of presentation of the petition has 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 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.

5. Companies/Corporations

Here 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.

7. Deceased Persons

There is a provision for administration in bankruptcy of the estate of a deceased person

under Section 121 (1) of the BA. Section 107 BA 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. Judgment Debtor

The BA 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.

THE ACTS OF BANKRUPTCY

These are basically covered under Section 3(1) BA. A debtor commits an act of

bankruptcy in each of the following cases:-

1. Conveying or assigning all property to a Trustee for the benefit of his creditors

generally; Section 3(1) (a) provides that if in Kenya or elsewhere a debtor

makes a conveyance or assignment of his property to a trustee or trustees for the

benefit of his creditors generally, he commits an act of bankruptcy. To

constitute an act of Bankruptcy hearing there must be a conveyance or an

assignment or the whole or substantially the whole of the debtors property.

Refer to Re Spackman (1890) 24 QBD 128. The assignment must be for the

benefit of all creditors generally and not just a class. Refer to Re Meghji

Nathoo (1960) E.A. 560 A creditor who has recognised a Deed of Arrangement

wherein a debtor has agreed on a plan of repaying the debt cannot rely on that

Deed as an act of bankruptcy. Refer to Re A Debtor (1939) 2 All E.R. 338

2. Fraudulent Conveyance provided for under Section 3(1)(b) of the BA this

second act of bankruptcy is that if a debtor makes a fraudulent conveyance gift

delivering or transfer of his property or any part thereof. Under the BA a

conveyance is fraudulent if it confers on one creditor an advantage which he

would not have under the Bankruptcy Laws or which tends to defeat or delay

creditors irrespective of whether the debtor had any dishonest intention although

this may be present. The transaction may be a conveyance, gift, delivery or

transfer of property and this includes mortgages or pledges as well as actual

conveyances and assignments. The conveyance need not be for the benefit of

any creditor and such transfers are frequently made for example to a member of

the debtors family. The conveyance need not be of the whole of the debtors

property.

BANKRUPTCY & SECURITIES Lecture 3

Fraudulent Conveyance:

The principles for determining whether a conveyance is fraudulent under the Bankruptcy

Act may be summarised as follows: -

1. Where a debtor transfers all or virtually his assets in payment of an antecedent

debt without receiving any present return for them this necessarily defeats or

delays his other creditors and is a fraudulent conveyance even when the

transaction is honestly entered into;

2. Where a debtor transfers all his assets for a full present consideration this is not

per se a fraudulent conveyance since the effect is merely to change the nature of

the property to which the creditor look for satisfaction but a fraudulent intent for

example to abscond with the proceeds of the sale could be proved if it is in fact

existed or it might shown that that so called sale was a sham designed to turn a

creditor from an unsecured into a secured creditor at the expense of other

creditors and in this latter case that will be fraudulent.

3. Where a debtor transfers part of his assets in payment of an antecedent debt, the

fraudulent intent must be proved and this will depend upon whether or not there

is sufficient property remaining after the transfer to enable the debtor to

continue in business and thus satisfy his other creditors. Secondly this will

depend upon whether the debtor is insolvent or not at the time and lastly it will

depend upon whether or not the conveyance has the effect of leaving his

insolvent.

4. Where a debtor mortgages or otherwise charges all his property to secure an

antecedent debt, this is conclusively presumed fraudulent as against the other

creditors.

3. FRAUDULENT PREFERENCE:

Section 3 (1) (c) of the BA as read with Section 49(1). If in Kenya or elsewhere he

makes any conveyance or transfer of his property or any part thereof or creates any

charge thereon which would under the BA or any other Act be void as a fraudulent

preference if you are adjudged bankrupt, this constitutes an act of Bankruptcy and

basically under Section 49(1) it is provided as follows:

Every conveyance or transfer of property or charge thereon made, every payment

made, every obligation incurred and every proceeding taken or suffered by any person

unable to pay his debts as they become due from his money in favour of any creditor

with a view of giving such creditor guarantor for the debt due to such a creditor a

preference over the other creditors is deemed to be fraudulent and is void as against the

trustee in bankruptcy if the person effecting the transaction is adjudged bankrupt on a

petition presented within 6 months after the date of the transaction.

4. LEAVING KENYA, KEEPING HOUSE & SIMILAR ACTS

BA Section 3(1) (d) is yet another act of bankruptcy. Here if a debtor departs from

Kenya or if out of Kenya remaining outside Kenya or departing from a dwelling house

or otherwise absenting himself or beginning to keep house is constituted as an act of

bankruptcy.

In order to establish this act of bankruptcy the creditor must prove that it was the

debtors intention to defeat or delay his creditors but it is not necessary to show that any

creditor was actually defeated. The intent may be presumed if it is a natural

consequence of the debtors act that the creditors will be defeated or delayed. Refer to

the case of Re Cohen (19500 2 All ER 36

This act of bankruptcy has 3 limbs

a. Departing from or remaining out of Kenya, where a person domiciled in Kenya

leaves the country after being pressed for payment by his creditors, there is a strong

presumption that his intention is to defeat creditors. However, this is not so if he

has a permanent residence abroad at which he remains or if a person domiciled

abroad leaves Kenya to return to the country of his domicile. Refer to Ex part

Brandon (1884) 25 Ch. D 500

The second limb of bankruptcy is departing from a dwelling house or otherwise absenting

himself. Here the absenting must be from the debtors place of business or usual aboard or

from one of more particular creditors elsewhere. It is an act of bankruptcy under this head

if a debtor having made an appointment to meet a creditor at a particular place fails to

attend to the appointment with intent to defeat it. Refer to the case of Re Worsley (1901)

K.B. 309 here where a married woman left her place of business without paying her

creditors or notifying her change of address, this was held to be an act of bankruptcy

although she left at her husbands request to live with him elsewhere.

3rd Limb

b. Beginning to keep house _ a debtor keeps house if he refused to allow his creditors

to see him or retires to some remote part of his house or business premises where

they cannot gain access to him. It must be shown that some creditor has been

denied an interview in this way but the creditor must seek the debtor at a reasonable

hour.

5. LEVYING EXECUTION AGAINST GOODS

Section 3(1)(e) of the Bankruptcy Act, where a judgment against a debtor remains

unsatisfied, the judgment creditor will usually seek to enforce it by levying execution on

the debtors goods. This will constitute an act of bankruptcy available to any other creditor

if the goods are sold by the Bailiff or retained by them for 21 days excluding the date of

seizure. The petition founded on this act must be presented within 3 months thereof .

Refer to the case of Re Beeston (1899) 1 QB 626. The Bailiff is in possession for the

purpose of this section where under a walking possession agreement he withdraws his

officer upon the debtors acknowledging that the goods have been seized and allows the

debtor to continue normal trading in the goods provided that a limit is imposed on the value

of the goods which can be dealt with in this way by the debtor. Refer to the case of Re

Dalton (1963) Ch. 336.

EXECUTION AGAINST GOODS.

If a 3rd party makes a claim to any of the goods seized, the bailiff must take out an inter

pleader summons to determine the ownership of the goods. The period occupied in dealing

with these summons is not to be counted in the 21 days.

6. DECLARATION OF INABILITY TO PAY DEBTS

B A Section 3 (1) (f) as read with Bankruptcy Rules 98. Here a formal declaration by the

debtor that he is unable to pay his debts or a bankruptcy petition presented against himself

the latter being the most common constitutes an act of bankruptcy upon delivery of the

document to the proper official of the court. A declaration of inability to pay debt is

required to be in Form No. 2 of the Bankruptcy Rules while a debtors petition is required

to be in Form No. 3 of the Bankruptcy Rules.

7. BANKRUPTCY NOTICE

Section 4 as read with Section 3(1) g of the BA. Here if the debtor fails to comply with the

provisions of a bankruptcy notice, within 7 days, he commits an act of bankruptcy. A

bankruptcy notice is a notice issued by the court and served on the judgment debtor calling

upon the debtor to pay the amount of the judgment debt or else satisfy the court that he has

a counter-claim set-off or cross-demand which equals or exceeds the amount of the

judgment debt and which the debtor could not set up in the action in which the judgment

was obtained. A bankruptcy notice must be preceded by a request of issue of the notice

and this is in Form No. 4 of the Bankruptcy Rules.

A bankruptcy notice must be in the prescribed form and must state the consequences of

non-compliance. It can only be issued at the instance of a creditor who has obtained a final

judgment in a Kenyan court or foreign court where there is reciprocity. The prescribed

form of a a bankruptcy notice is Form No. 5 under the Bankruptcy Rules. The period of 7

days for compliance applies where the notice is served in Kenya. If served abroad the court

will fix the time for payment in order to give leave to serve it abroad. The notice must

require payment to be made in exact accordance with the terms of the judgment. Therefore

if by agreement with a creditor payment is to be made by instalments, a notice cannot issue

on the failure to pay one instalment for the whole of the unpaid balance unless it was

provided but the whole balance should become due on failure to pay any instalment. If a

portion of the judgment debt 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 depth.

But a bankruptcy notice will not be invalidated by reason only that the sums specified in

the notice as the amount due exceeds the amount actually due unless the debtor within the

time allowed for payment gives notice to the creditor that he disputes the validity of the

notice on the ground of such misstatement. If the debtor does not give such notice he is

deemed to have complied with the bankruptcy notice if within the time allowed he takes

such steps as would have constituted a compliance with the notice had the actual amount

due been correctly specified therein. It should be noted that two separate judgment debts

cannot be included in one notice.

A bankruptcy notice cannot be issued if execution on the judgment has been stayed. The

debtor after service of the notice may seek to have it set aside if he has a counter-claim, set-

off or cross-demand which equals or exceeds the amount of the judgment debt and which

he could not have set up in the action on which the judgment was obtained or for any other

reasons. 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 which is available not only to the creditors issuing the notice but to any other

creditor provided that he obtains an affidavit of non-compliance from the creditor issuing

the notice.

8. GIVING NOTICE TO CREDITORS OF SUSPENSION OR INTENTION TO

SUSPEND DEBTS

Section 3(1) (h) BA. Here a statement by a debtor that he has suspended or is about to

suspend payment of his debts needs no particular formality but the notice must be given in

such a manner as to show that his intention was to give information that he has suspended

all those about to suspend payment. That will constitute an act of bankruptcy for example

notice of Suspension has been inferred where a trader summoned a meeting of his creditors

with a view to proposing a composition.

Refer to the case of Crook V. Morley [1891] A.C. 316. It has also been inferred where a

debtor made a verbal statement to the managing clerk of the solicitors acting on behalf of

his creditors that he was unable to pay his debts.

Re a debtor [1929] 1 Ch. 362. A notice given without prejudice has been held to be

admissible as proof of the acts of bankruptcy. In Re Daintrey [1893] 2 Q.B. 116.

Bankruptcy & Commercial Securities-Lecture 6

The First Meeting of Creditors

It is provided under section 14 and 15 of the BA as read with the first schedule to the BA.

As soon as may be after the making of the receiving order against a debtor a general

meeting of his creditors referred to as the first meeting shall be held for the purpose of

considering whether a proposal for a composition or scheme of arrangement shall be

accepted or whether it is expedient that the debtor shall be adjudged bankrupt and generally

as to the mode of dealing with a debtors property with respect to the summoning of and

proceedings at the first and other meetings of creditors the rules in the first schedule to the

BA apply.

The official receiver must summon the first meeting of creditors not latter than 60 days

after the date of the receiving order. He must give not less than 6 clear days notice of the

time and place in the Kenya Gazette and in a local daily paper. Furthermore he must send a

note to each creditor mentioned in the statement of affairs. Together with this notice he

must also send a summary of the statement of affairs with comments which he may wish to

make as well as a form of proxy if a composition or scheme of arrangement is to be

considered at the meeting he must send a copy of the scheme and his remarks thereof.

Notice must also be sent to the debtor to attend the meeting.

The official receiver or his nominee shares the meeting. All creditors may attend but a

creditor who has not previously lodged approval of his debt may not vote at the meeting.

The purpose of the meeting is to decide whether the debtor should be adjudged bankrupt or

whether any composition or scheme which he may have submitted should be accepted and

in the former case the creditors may appoint a trustee and a committee of inspection.

Composition or scheme of arrangement

This is provided for under section 18 BA and BR 160-169. A composition is an

arrangement between two or more persons for the payment of one to the others of a sum

of money in satisfaction of an obligation to pay another sum differing either in amount or

mode of payment.

A scheme of arrangement is a proposal of dealing with his debts by an insolvent debtor by

applying his assets or income in proportionate payment of them which proposal if agreed

by his creditors or the requisite majority of them. Therefore the scheme or composition is

on the debtors initiative. If the debtor wishes to make a proposal for a composition or for a

scheme of arrangement of his affairs the provisions of section 18 BA come into operation:

1. He must lodge his proposal with an official receiver within 4 days of submitting his

statement of affairs or within such further time as the official receiver may allow.

The proposal must be in writing and signed by the debtor.

2. The official receiver must summon a meeting of creditors before the public

examination of the debtor is concluded and send to its creditors before the meeting

a copy of the debtors proposal with his report attached thereto.

3. The proposal must be approved by a majority in number and three-quarters in

value of all the creditors who have proved their debts. Creditors may vote by letter

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in the subscribed form to the official receiver so as to be received by him not later

than the day preceding the meeting. Creditors who do not vote are regarded as

voting against the resolution.

4. The debtor may at the meeting amend the terms of his proposal if the amendment

is in the opinion of the official receiver calculated to benefit the general body of

creditors.

5. After the proposal is accepted by the creditors it must be approved by the court.

Either the debtor or the official receiver may apply to the court to approve it and

three days notice of the time appoint for hearing the application must be given to

each creditor who has proved his debts.

6. The application cannot be heard until after the conclusion of the public

examination of the debtor. Before approving the proposal the court must here the

report of the official receiver as to its terms and as to the conduct of the debtor and

any objections which may be made by or on behalf of any creditor. A creditor may

oppose the application not withstanding that he voted for its acceptance at the

meeting of creditors.

7. The court must refuse to approve the proposal if in its opinion the terms of the

proposal are unreasonable or not for the benefit of the general body of creditors.

8. In any other case, the court may either approve or refuse to approve the propose.

9. Once a composition or scheme is approved by the court it is binding on all

creditors whose debt are proved with the exception unless the creditor accepts the

proposal of those debts from which the debtor will not be released by an order of

discharge.

10. If the scheme is approved the receiving order is rescinded and subject to payment

of the official receivers costs, the debt or the trustee under the scheme is put in

possession of the property.

11. The scheme may be annulled in the following cases:

(i) if default is made in payments of any instalments due under the

scheme; or

(ii) if it appears to the court that the scheme cannot in consequence of

legal difficulties or for any sufficient cause proceed without injustice

or undue delay to the creditors or the debtor; or

(iii) if the consent of the court was obtained by fraud.

If the scheme is annulled the court may adjudge the debtor bankrupt but any dispositions or

payments made under the scheme remain valid.

The creditors may also accept a proposal for a composition or scheme at any time after

adjudication. The procedure is the same as in the case of a composition or scheme accepted

before adjudication and upon approving the scheme the court may annul the adjudication

order. Where the adjudication is annulled any assets remaining after payments to the

creditors of the amount owed them under the scheme in respect of which no order has been

made reverts in the debtor.

Public Examination of the Debtor

Section 17 Bankruptcy Act as read with BR 151-159. Where a receiving order has been

made the official receiver applies to the court for the appointment of a time and place for

the public examination of the debtor. The examination must be held as soon as is

convenient after the expiration of the time for the submission of the debtors statement of

affairs. The court may adjourn it from time to time.

The official receiver must notify the debtor and creditors of the time and place of the

examination and must advertise the order in the Kenya Gazette and in a local daily papers.

The public examination may be dispensed with under the provisions of section 17n(11)

BA. If the debtor fails without sufficient cause to attend the examination the court may

issue a warrant for his arrest. In this case and also if the debtor fails to disclose his affairs

or comply with an order of court in relation to his affairs the court may adjourn the

examination sine die. It may then adjudge the debtor bankrupt forthwith and he will be

unable to obtain discharge until he can obtain an order of the court for the examination to

be continued. Any creditor who has lodged proof of his debt or his representative

authorized in writing may put questions to the debtor concerning his affairs and causes of

his failure.

The official receiver or trustee if one has been appointed and the court take part in the

examination and put questions to the debtor. The debtors advocate may also attend the

examination but not ask any questions or address the court. The debtor is examined on oath

and must answer all questions which the court may put or allow to be put to him. Notes of

the examination are taken down in writing and after being read over to or by the debtor and

signed by him may be used in evidence against him in other proceedings. These notes are

open to the examination by the creditors at all reasonable times.

When the court is of the opinion that the affairs of the debtor have been sufficiently

investigated it makes an order declaring that the examination is concluded but the order

cannot be made until after the day appointed for the first meeting of creditors.

The power to arrest the debtor

Under section 26 BA the court may order the arrest of the debtor and the seizure of any

books, papers or goods in his possession in the following circumstances:

1. If after a bankruptcy notice has been issued or after a petition has been presented

by or against him, there is a probably reason for believing that he has absconded

or is about to abscond with a view to avoiding payment of the debt in respect of

which the bankruptcy notice was issued or avoiding service of a bankruptcy

petition or attending an examination or otherwise delaying or embarrassing the

proceedings against him

2. The debtor may also be arrested if after presentation of a petition by or against

him there is cause to believe that he is about to remove his goods with a view of

prevent or delaying possession being taken of them by the official receiver or

trustee or that there is ground for believing that he has concealed or he is about to

conceal or destroy any of his goods or any books, documents or writings which

might be of use to his creditors

3. If after service of a petition or the making of a receiving order he removes any

goods in his possession above the value of five pounds without the leave of the

official receiver or trustee

4. if without good cause shown he fails to attend any examination ordered by the

court.

It should be noted that no arrest is valid upon a bankruptcy notice unless the notice is

servable upon the debtor before or at the time of his arrest.

BANKRUPTCY & SECURITIES Lecture IV

PROCEDURE OF ADJUDICATION

A. The Petition:

As noted earlier bankruptcy proceedings are begun by the presentation of a petition by the

debtor himself or by a creditor against the debtor. This is in accordance with the provisions

of Section 5 of the BA.

Petition of Debtor against himself:

Under Section 8(1) of the Bankruptcy Act and Bankruptcy Rules 105 a debtor may

present his own petition.

1. The filing of which is deemed to be an act of bankruptcy.2. The petition must state that the debtor is unable to pay his debt and must request

that a receiving order or an adjudication order be made.3. A receiving order is made at once without any hearing in accordance with BR 125.

An adjudication order may also be made at once. 4. The debtor must file with the official receiver a statement of affairs prepared in

accordance with the provisions of Section 16 of the BA. 5. The petition must further comply with the provisions of BR 106 to 108. A debtors

petition shall not after presentation be withdrawn without leave of the court.

2. Creditors Petition

Any person entitled to enforce payment of a debt at law or equity may be a petitioning

creditor. A creditor may petition if the following conditions are satisfied:

1. Pursuant to Section 106 Bankruptcy Act and Bankruptcy Rules 110

(a) The amount owed is not less than 50 pounds or Kshs. 1000 as fixed

under the English Bankruptcy Act of 1914;

(b) The debt is a liquidated sum payable either immediately or at some

certain future time;

(c) The act of bankruptcy on which the petition is grounded has occurred

within 3 months before the presentation of the petition;

(d) 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.

The debt due to the petitioning creditor must have existed as a liquidated sum i.e. a

fixed sum or one capable of being computed with certainty at the date of the act of

bankruptcy. It is not sufficient that the debt should have become liquidated at the date

of presentation of the petition if it had in fact been un-liquidated at the earlier debt.

Refer to Re Debtors [1927] 1. Ch. 19 and Mohammed V. Lobo [1953] EACA 117.

2. The Hearing of the Petition :

Bankruptcy Rules

Under BR 125 where a petition is filed by a debtor the court shall forthwith make a

receiving order thereof.

1. The hearing of a creditors petition takes place after the expiration of 8 days from

the date of service thereof on the debtor.

2. 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.

OPPOSITION BY THE DEBTOR.

Under BR 128 if the debtor wishes to oppose the petition he must file a notice with the

registrar of the court specifying the statements in the petition which he denies. Further he

must also 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 BR 126 the petitioning creditor must prove:

1. The debt.

2. Service of the petition on the debtor.

3. The act of bankruptcy being relied on

Thereupon the court may make a receiving order as per section 5 BA for the protection of

the Estate.

DISMISSAL OF THE PETITION

1. If the court is not satisfied with prove 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 BA.

2. If the Act of bankruptcy which is being relied upon is non-compliant with a

bankruptcy notice the court may if it thinks fit stay or dismiss the petition if an

appeal is pending from the judgment or order. Section 7(4) as read with 7(5) BA.

The court may also stay all proceedings on the petition if the debtor denies indebtness 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 creditor cannot rely upon an act of bankruptcy committed before his debt came

into existence but the debt need not have been due to the petitioning creditor at the date of

the act of bankruptcy. A petition once presented cannot be withdrawn without leave of the

court.

3. Appointment of Interim Receiver:

BA Section 10.

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 himself appoint 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. Refer to BR

119 TO 124.

4. The Receiving Order:

Section 9 of the BA as read with BR 138 to 148.

If the court does not dismiss or stay the petition, it will make a receiving order. Upon the

making of the receiving order the official receiver becomes receiver of the debtors

property. Thereafter no legal proceedings may be brought or the debt provable in the

bankruptcy except by leave of the court. Once the official receiver steps in no proceedings

can be brought against the debtor except with the leave of the court. This however does not

prejudice a secured creditors rights to deal with his security according Section 9(2) as read

with Section 6(2) BA.

The receiving order 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.

The 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 must

be published in the Kenya Gazette and one of the local daily papers. Section 13 of the BA

as read BR 145. The production of a copy of the Gazette containing any notice of the

receiving order is conclusive evidence that the order was duly made on the stated date.

Even after the making of the receiving order the debtor may apply for its rescission in

accordance with BR 147 to 148.

5 Debtors Statement of Affairs:

Upon the making of a receiving order the debtor must attend a private interview to

determine how the Estate should be administered and to receive instructions as to the

preparation of his statement of affairs. The debtor must submit his statement of affairs to

the official receiver within 3 days of the receiving order if the order is made on the debtors

own petition or within 14 days or if the order is made on the creditors petition. It may be

extended by the court or official receiver on application of the debtor. BA 16(1) BR 149 to

150. The statement of affairs must be in the prescribed form verified by Affidavit and

must show the following:

(a) The particulars of assets, debts and liabilities;

(b) The names, residencies and occupations of the creditors;

(c) The securities if any held by them respectively and the dates when they were

given and

(d) Such further or other information as may be prescribed or as the official

receiver may require.

Under Section 16(3) BA if the debtor fails without reasonable excuse to comply with these

requirements, the court may on the application of the official receiver or of any creditor

adjudge him bankrupt.

Any person stating himself in writing to be a creditor of the bankrupt may personally or by

agent inspect the statements of affairs at all reasonable times and take a copy thereof. But

if any person untruthfully states that he is a creditor, then he shall be guilty of contempt of

court and be punished accordingly on the application of the trustee in bankruptcy or the

official receiver.

Bankruptcy & Commercial Securities Lecture 7

THE ADJUDICATION ORDER

Reference may be made to the BA Section 20 and BR 180 185.

The grounds for Making an Adjudication Order

When a receiving order has been made the official receiver or any creditor may apply to the

court to adjudge the debtor bankrupt.

The court may adjudge the debtor bankrupt in the following cases:

1. If the creditors at their first meeting or at any adjournment thereof so resolve

by ordinary resolution;

2. If they pass no resolution;

3. If they do not meet at all;

4. If a composition or scheme is not approved within 14 days after the conclusion

of the public examination of the debtor or such further time as the court may

allow;

5. If the debtor applies to be made Bankrupt;

6. If a quorum of creditors has not attended the first meeting of creditors or one

adjournment thereof;

7. If the court is satisfied that the debtor has absconded or does not intend to

propose a composition or scheme;

8. If the public examination is adjourned sine die;

9. If the debtor without reasonable cause fails to submit his statement of affairs;

10. If a composition of scheme is annulled by the court.

Upon the making of an adjudication order, notice thereof must be gazetted and advertised

in a local paper.

Annulment of the Adjudication Order :

The adjudication order may be annulled in the following cases:

1. If in the opinion of the court the debtor ought not to have been adjudged bankrupt;

2. If his debts are paid in full;

3. If a composition or scheme is accepted by the creditors and approved by the court;

The court has a discretion as to annulling the adjudication order and may do so where the

bankrupt has committed bankruptcy offences even if the debts are paid in full. Here a

voluntarily lease by a creditor is not equivalent to payment in full by the debtor.

Under Section 33(b) any debts disputed by the debtor is considered as paid in full if he

enters into a bond in such sum and with such sureties as the court approves to pay the

amount to be recovered in any proceedings for its recovery with costs. Also any debts due

to a creditor who cannot be found or cannot be identified is considered as paid in full if

paid into court. it should be noted that the annulment of an adjudication does not affect the

validity of any sales or dispositions of property or other acts properly done by the official

receiver, trustee or any person acting under their authority or by the court.

The annulment of an adjudication order releases the debtor from the personal disabilities

imposed upon him by the bankruptcy but does not prevent criminal proceedings from being

brought against him for Bankruptcy offences.

DISABILITIES OF A BANKRUPT

Upon adjudication the bankrupt becomes subject to the following disabilities:

1. All property belonging to him including property acquired by him prior to his discharge vests in the trustee in Bankruptcy for distribution among his creditors;

2. He must not either alone or jointly with any other person obtain credit to the extent of 10 pounds or upwards from any person without informing that person that he is an undischarged bankrupt; Section 139 (a) BA;

3. He must not engage in any trade or business under a name other than that under which he was adjudicated bankrupt without disclosing to all persons with whom he enters into any business transactions the name under which he was adjudicated Section 139 (b) of the BA;

4. Under Section 188 of the Companies Act he cannot act as a director of a company or directly or indirectly take part in the management of a company except by leave of the court by which he was adjudged bankrupt;

5. He cannot act as a receiver or manager of the property of a company on behalf of the debenture holders except under appointment made by order of the court;

6. Under Section 35 (1) (d) of the current Constitution a bankrupt is disqualified from being a member of parliament or a member of a local authority if elected he will have to relinquish his seat;

7. He cannot act as an advocate under Section 32 of the Advocates Act Cap 16 of the Laws of Kenya.

DISCHARGE OF A BANKRUPT

Application for Discharge:

Section 129 and BR 186 to 197.

The Bankrupt can apply for his discharge at any time after adjudication but the

application cannot be heard until after the public examination is concluded.

The registrar of the court must give 28 days notice of the time and place of the

Hearing to the official receiver and the Trustee.

The official receiver must forthwith send notice thereof for gazetting and must give

14 days notice or the Hearing to every creditor.

At the hearing of the application which is held in open court the official receiver

submits a report as to the bankrupts conduct during the proceedings of his

bankruptcy.

A copy of this report must be forwarded to the bankrupt not less than 7 days before

the hearing and if the bankrupt wishes to dispute any statement therein, he must

notify the official receiver of this fact not less than 2 days before the hearing.

A creditor who wishes to oppose the discharge on any ground other than those mentioned

in the official receivers report must not less than two days before the hearing file in the

court a written notice of his intended opposition stating the grounds thereof and serve a

copy on the official receiver and the bankrupt.

Courses Available to the Court:

At the Hearing the court may do any of the following things:

1. Grant an absolute and immediate discharge;

2. Refuse the discharge;

3. Grant an order of discharge subject to conditions with respect to any earnings

or income which may afterwards become due to the bankrupt or with respect to

his after-acquired property;

The court will normally only grant an unconditional absolute discharge where the

bankrupt is entitled to a certificate of misfortune i.e. a certificate of the court to the

effect that the bankruptcy was brought about by causes beyond the debtors control without

any misconduct on his part. This has the effect of releasing the debtor from those statutory

disqualifications which will otherwise attach to him after discharge. There are no cases in

which the court is bound to refuse a discharge but it cannot grant an immediate and

conditional discharge. Where the bankrupt has been convicted of any offence connected

with his bankruptcy or where any of the following facts have been proved against him:

These facts as contained in Section 30 BA

(a) That his assets are not of a value equal to 10 shillings in the pound on the

amount of his unsecured liabilities unless this is due to circumstances for

which he cannot justly be held responsible;

(b) That he has omitted to keep such books of accounts as are usual and proper

in the business carried on by him within 3 years immediately preceding his

bankruptcy;

(c) That he has continued to trade after knowing himself to be insolvent;

(d) That he has contracted any debt provable in the bankruptcy without having

at the time of contracting any reasonable or probable expectation of being

able to pay it;

(e) That he has failed to account satisfactorily for any loss of assets or for any

deficiency of assets to meet his liabilities;

(f) That he has brought on or contributed to his bankruptcy by rash and

hazardous speculations or by unjustifiable extravagance in living or by

gambling or by neglect of his business affairs;

(g) That he has put any of his creditors to unnecessary expense by frivolous or

vexatious defence to any action properly brought against him;

(h) That he has brought on or contributed to his bankruptcy by incurring

unjustifiable expense in bringing a frivolous or vexatious action;

(i) That he has within 3 months preceding the date of the receiving order when

unable to pay his debts as they became due given undue preference to any of

his creditors;

(j) That he has within 3 months preceding the date of the receiving order

incurred liabilities with a view to making his assets equal to 10 shillings in

the pound on the amount of his unsecured liabilities;

(k) That he has on any previous occasion been adjudged bankrupt or made a

composition or arrangement with his creditors; and

(l) That he has been guilty of any fraud or fraudulent breach of trust.

Where any such facts or offences are proved the court may either

(i) Refuse the discharge or;

(ii) Suspend the discharge for such period as it thinks fit; or

(iii) Suspend the discharge until a dividend of not less than 10 shillings in the

pound has been paid to the creditors; or

(iv) Grant a discharge subject to the condition that the bankrupt consents to a

judgment being entered against him for any balance or part of any balance

of the debts still remaining unpaid to be discharge out of his future earnings

or after acquired property.

The court has a similar power where the BANKRUPT has made a settlement of property

before and in consideration of marriage at a time when he was unable to pay his debts

without the aid of such settled property or has contracted in consideration of marriage to

settle on his wife or children property to be subsequently acquired by him and it appears to

the court that the settlement or contract was made in order to defeat or delay creditors or

was unjustifiable having regard to the state of affairs at the time it was made. ( this is

called a fraudulent settlement within the context of Section 30 of BA)

Where a bankrupt is discharged unconditionally, it is his duty until the judgment or

condition is satisfied to give the official receiver any information he may require about his

earnings or after acquired property and to file in court an annual statement verified by

affidavit giving particulars of any property or income acquired since discharge.

At any time after the expiration of 2 years from the date of the order, the terms and

conditions of that order may be varied by the court if the bankrupt can satisfy the court that

there is no reasonable probability of his being in a position to comply with them. A

discharge bankrupt notwithstanding his discharge must continue to give the trustee any

assistance he may require in the realisation and distribution of the estate and if he fails to

do so, he is guilty of contempt of court. the court may also revoke his discharge if it thinks

fit but without prejudice to the validity of any disposition of this property which occurred

after the discharge and before its revocation.

Effect of Order of Discharge:

An order of discharge under Section 32 BA releases the bankrupt from all debts provable in

bankruptcy except the following:

1. Debts due to the government for breach of a statute relating to any

branch of the public revenue or on a recognizance unless the Permanent

Secretary to the Treasury gives a written consent to his release therefrom;

2. Debts incurred by fraud or fraudulent breach of trust;

3. Any liability under a judgment against him in an action for seduction

or under an affiliation order or under a Judgment against him as a

correspondent in a matrimonial cause unless the court orders otherwise;

An order of discharge does not release any person who at the date of the receiving order

was a partner co-trustee or surety of the bankrupt. The order releases the bankrupt from all

personal disabilities imposed upon him as a result of the adjudication other than those

which by statute continue to apply for a fixed period after his discharge. He is only

released from this if he obtains a certificate of misfortune. The Order will not however free

him from any liability to be prosecuted for any bankruptcy offences which he may have

committed.

BANKRUPTCY OFFENCES:

BANKRUPTCY & COMMERCIAL SECURITIES LECTURE 12

Section 7 declares that certain provisions if contained in the Hire Purchase Agreement will

be absolutely void. These are:

1. Any provisions that allow the owner of goods or his agent to enter the Hirers

premises to retake possession of the goods.

2. Any provision that attempts to prevent the hirer from terminating the agreement

as provided for in Section 12 of the Act or

3. Any provisions that adds extra liabilities should the hirer terminate the

agreement;

4. Any provision that attempts to relieve the owner of goods from liabilities for the

default of these agents;

The section therefore stands out as an attempt to reduce the doctrine of freedom of contract

and to mitigate the harshness of the imposed standard form contract.

REPOSSESSION & THE MINIMUM PAYMENT CLAUSE

Section 15 (1) of the HPA provides that where goods have been let under a hire purchase

agreement and two thirds of the hire purchase price has been paid, the owner shall not

enforce any right to recover possession of the goods otherwise than by suit. If the owner

contravenes this provision the hirer is immediately released from liability under the

Agreement.

Secondly the hiring terminates and the hirer can recover by suits all moneys paid out by

him. It has been argued that the Section gives the hirer some protection although that

protection is half-hearted. Mentioned by Professor Mutunga and Piciotto and Whitford

and Mcneil

Section 12 (1) allows the hirer to terminate the agreement by giving notice in writing to the

owner. If he does so, the minimum payment clause comes into operation whereby he will

have to pay upto 50% of the Hire Purchase Price or less should the agreement so stipulate.

CONDITIONS & WARRANTIES

Conditions, Warranties and Exclusion Clauses:

The Hire Purchase Act imposes implied terms and restricts their exclusion. Section 8 (1)(a)

implies a condition that the owner will have a right to sell the goods at the time when

property is to pass.

Secondly 8(1) (b) implies a warranty that the hirer shall have and enjoy quiet possession of

the goods.

Thirdly Section 8(1)(c) implies a warranty that the goods will be free from any charge or

encumbrance in favour of a third party at the time when property is to pass.

Under Section 8(1) (d) there is an implied condition that the goods are or merchantable

quality unless they are second hand goods and the agreement says so. Furthermore this

implied condition is negatived in those cases where the hirer has examined goods or a

sample thereof and the examination ought to have revealed the defect or where the owner

could not have reasonably detected the defect.

There is a further implied condition under Section 8(2) to the effect that the goods are

reasonably fit for their purpose where the hirer whether expressly or by implication has

made known the particular purpose for which the goods are required.

It should be noted that the implied conditions as to sample and description are not expressly

stated in the Hire Purchase Act unlike in the Sale of Goods Act where they are. In fact

Section 8(4) of the HPA refers back to the English common Law where an implied term as

to description is available to hirers but it is not clearly so for the implied condition as to

sample.

Finally it should be noted that Section 8(3) prohibits the parties from contracting out of the

implied conditions and warranties. This section thus limits the use of exclusion clauses to

exclude liability for defect in the goods and thus stands out as a measure of consumer

protection.

MISCELLANEOUS PROVISIONS

Part IV of the HPA deals with aspects relating to change of address and removal of goods

from premises. It also deals with removal of goods from Kenya and it also deals with those

situations where the court may allow goods to be removed.

Part VII of the HPA deals with licensing of Hire Purchase businesses. In order to operate

one must have a licence. Where the licence is refused there are provisions for appeal to the

minister and there is a provisions that the licences if granted have to be displayed.

Other miscellaneous provisions are contained in Sections 24, through to 35 but these do not

fundamentally alter the hirer purchase transactions.

OTHER SECURITIES

These are basically

1. Guarantee

2. Indemnity

3. Bailment

4. Pledge /Pawn

5. Lien

6. Letter of Hypothecation

7. Mortgage/Charge

8. Debentures

9. Chattels Transfer Chattels Transfer Act Cap 28

Bankruptcy & Commercial Securities Lecture 8 30th July 2004

BANKRUPTCY OFFENCES:

Generally while the fact that a person has been adjudicated bankrupt does not in itself give

rise to any criminal liability, the bankrupt may be guilty of one or more or the offences

specified in the BA if he has misconducted himself with regard to his affairs either before

or during the currency of the Bankruptcy.

There are various categories of offences the most elaborate ones are in the first category

1. miscellaneous offences;

this are quite lengthy ranging from a to t. under section 138 sub section 1 any person who

has been adjudged bankrupt or in respect of whose estate a receiving order has been made

shall be guilty of an offence unless he proves that he had no intent to defraud

(a) If he does not to the best of his knowledge and belief fully and truly disclose to

the trustee or of his property and how and to whom and for what consideration

and when he disposed of any part thereof except such part as has been disposed

off in the ordinary way of his trade or laid out in the ordinary expense of his

family; non-disclosure

(b) If he does not deliver up to the trustee or as he directs all or such part of his

property which is in his custody or under his control and which he is required by

law to deliver up, and this constitutes the offence of non-delivery of property

(c) If he does not deliver up to the trustee or as he directs all books documents

papers and writings relating to his property or affairs this constitutes the offence

of non-delivery of books or documents

(d) If after the presentation of a bankruptcy petition or within two years next before

presentation he conceals any part of his property to the value of 200/- or more or

conceals any debts due to or from him this constitutes the offence of

concealment of property

(e) If after presentation of a bankruptcy petition or within two years next before

presentation he fraudulently removes any part of his property to the value of

200/- or more this constitutes offence of removal of property;

(f) If he makes any material omission in any statement relating to his affairs, this

constitutes omission in statement of affairs;

(g) If knowing or believing that a false debt has been proved by any person under

the Bankruptcy he fails within one month to inform the trustee this constitutes

not informing trustees of false claims;

(h) If after presentation of a petition he prevents the production of any book

document paper or writing affecting or relating to his property or affairs unless

he proves that he had no intent to conceal the state of his affairs or to defeat the

law this is the offence of preventing production of books or documents;

(i) If after presentation of a petition or within two years next before presentation he

conceals destroys mutilates or falsifies or is privy to the concealment,

destruction, mutilation or falsification of any book or document affecting or

relating to his property or affairs unless he proves that he had no intent to

conceal the state of his affairs or to defeat the law, this constitutes destruction of

books or documents;

(j) If after presentation of a bankruptcy petition or within two years next before

presentation he makes or is privy to the making or any false entry in any book

or document affecting or relating to his property or affairs unless he proves that

he had no intent to conceal the state of his affairs or to defeat the law this

constitutes the offence of false entry in books or documents;

(k) If after presentation of a bankruptcy petition or within two years next before

presentation he fraudulently parts with, alters or makes any omission in or is

privy to fraudulently parting with, altering or making any omission in any

document affecting or relating to his property or affairs, this constitutes the

offence of parting with or altering of documents;

(l) If after presentation of a bankruptcy petition or at any meeting of his creditors

within two years next before presentation he attempts to account for any part of

his property by fictitious losses or expenses this constitutes accounting for

property by fictitious losses;

(m) If within two years next before the presentation of a petition or after

presentation but before the making of a receding order he by any false

representation or other fraud has obtained any property on credit and not paid

for it, that is termed obtaining property on credit by fraud;

(n) If within two years next before presentation of a petition or after presentation

but before the making of a receiving order he obtains under the false pretence of

carrying on business and if a trader or dealing with the ordinary way of his trade

any property on credit and does not pay for it this constitutes obtaining property

on credit on pretence of carrying on business;

(o) If within two years next before presentation of a petition or after the

presentation but before the making of a receiving order he pawns, pledges or

disposed of any property which he has obtained on credit and not paid for it

unless in the case of a trader the pawning pledging or disposing is in the

ordinary way of his trade and unless in any case he proves that he had no intent

to defraud that offence is termed pawning property obtained on credit;

(p) If he is guilty of any false representation or other fraud for the purpose of

obtaining the consent of his creditors or any of them to an agreement with

reference to his affairs or his bankruptcy this constitutes obtaining consent of

creditors by fraud;

(q) If he makes default in payment for the benefit of creditors of any portion of her

salary or other income in respect of the payment of which the court is authorised

to make an order this constitutes default in payment;

(r) If within one year immediately preceding the date of the making of the

receiving order he has continued to trade or carry on business after knowing

himself to be insolvent this constitutes trading when insolvent;

(s) If within 6 months before the making of a receiving order he sells goods at a

price lower than cost unless he proves that he had no intention to defraud his

creditors this constitutes selling goods below cost price;

(t) If he has contracted any debt provable in the bankruptcy without having at the

time of contracting it any reasonable or probable ground or expectation or being

able to pay it this constitutes miscellaneous offences.

2. Fraud by the Bankrupt;

Section 140 sub section 1 states that any person who has been adjudged bankrupt or in

respect of whose estate a receiving order has been made is guilty of an offence in the

following 3 cases;

(a) If in incurring any debt or liability he has obtained credit under any false

pretences or by means of any other fraud;

(b) If with intent to fraud any of his creditor he has made or caused to be made

any gift or transfer or charge on his property;

(c) If with intent to defraud his creditors he has concealed or removed any part

of his property since or within two months before the date of any unsatisfied

judgment or order for payment of money obtained against it.

3. Obtaining Credit:

An undischarged bankrupt is guilty of an offence under Section 139(b) in the following two

cases:

(a) If either alone or jointly with any other person obtains credit over a 100/- or

more from any person without disclosing that he is an undischarged

bankrupt; or

(b) If he engages in any trade or business under a name other than that under

which he was adjudicated without disclosing to all persons with whom he

enters into any business transactions the name under which he was

adjudicated bankrupt.

4. Gambling:

Section 141(1) provides that any person who has been adjudged bankrupt or in respect of

whose Estate a receiving order has been made shall be guilty of an offence if having been

engaged in any trade or business and having outstanding at the date of the receiving order

any debts contracted in the course and for the purposes of that trade on business:

(a) He has within two years prior to the presentation of the petition materially

contributed to or increase the extent of his insolvency by gambling or by

rush and hazardous speculation and the gambling or speculations are

unconnected with his trade or business or;

(b) He has between the date of presentation of the petition and the date of the

receiving order lost any part of his estate by gambling or rush and hazardous

speculation or

(c) On being required by the official receiver at any time or in the cause of his

public examination by the court to account for the loss of any substantial

part of his Estate incurred within a period of a year next preceding the date

of the presentation of the petition or between that date and the date of the

receiving order he fails to give a satisfactory explanation of the manner in

which the loss was incurred.

5. Failure to keep proper books :

Section 142 (1) BA provides that any person who has been adjudged bankrupt or in respect

of whose estate a receiving order has been made shall be guilty of an offence if having been

engaged in any trade or business during any period in the 3 years immediately preceding

the date of presentation of the petition he has not kept proper books of account throughout

that period and throughout any further period in which he was so engaged between the date

of the presentation of the petition and the date of the receiving order or has not reserved all

books of accounts so kept.

6. Bankrupt Absconding with Property :

Section 143 BA provides that if any person who is adjudged bankrupt or in respect of

whose estate a receiving order has been made after the presentation of a petition or within 6

months before presentation quits Kenya or attempts or makes preparation to quit Kenya, he

shall unless he proves that he had no intent to defraud be guilty of an offence.

BANKRUPTCY & COMMERCIAL SECURITIES LECTURE 10 13 .8. 04

DISTRIBUTION OF THE ESTATE:

Provisions relating to this are to be found in the second schedule to the BA.

(i) Any creditor who wishes to make a claim against the estate of the Bankrupt

must prove his debt to the satisfaction of the Trustee. The Trustee is under

a duty to convert all the Bankrupts property which is divisible among

creditors into money and to distribute the proceeds by way of dividends

among creditors who have proved in accordance with a due order of

priorities and in proportion to the amounts due to them. Up until he has

proved his debt a creditor is not entitled to vote at any meeting of creditors

or to receive any dividend.

DEBTS PROVABLE IN BANKRUPTCY

(a) Approvable Debts

Section 35 (3) B.A. states that all debts and liabilities present or future certain or contingent

to which the data is subject at the date of the receiving order or to which he may become

subject before his discharge by reason of any obligation incurred before the date of the

receiving order are deemed to be debts provable in bankruptcy.

(b) Non Provable Debts SECTION 35 BA

The following debts are not provable in bankruptcy

(i) Claims for unliquidated damages in tort; this is under Section 35(1) B.A.

herein demands in the nature of unliquidated damages arising otherwise than

by reason of a contract promise or breach of trust are not provable in

bankruptcy. Therefore claims arising out of a tort committed by the

bankrupt cannot be proved unless the damages become liquidated by

agreement or judgment before the dates of the receiving order. A claim

arising out of a breach of contract fraud or breach of trust cannot be

excluded merely because the claim might alternatively be founded in tort.

(ii) Debts incurred after notice of unavoidable act of bankruptcy under Section

35(2) B.A.

(iii) Debts incurred after the date of the receiving order Section 35(3) BA

(iv) Unenforceable Debts: these are debts founded on an illegal or immoral

consideration or statutes-barred debts;

(v) Debts incapable of being fairly estimated under Section 35(6) of B.A

(vi) Alimony and maintenance the common law liability of a husband to

maintain his wife is not a contractual liability and therefore does not

constitute a provable debt.

(c) Contingent Liabilities

A contingent liability is one which at the date of prove is not certain to arise. It is

dependent upon the happening of some event which may or may not take place. Subject to

certain rules a creditor may prove for the full value of a contingent liability

(d) Periodical Payments:

Under Section 19 of the BA here where in rent or other payment falls due at stated periods

and the receiving order is made at any time other than any one of those periods the person

entitled to the payment may prove for a proportionate part thereof upto the date of the order

as if payment accrued due from day to day.

(e) Interest on Debts:

Under Section 36 B.A. here interest on debts is provable and payable.

MUTUAL DEALINGS

A creditor must subtract from what he is owed, from what he owes a debtor.

Secured Creditors

Those who hold mortgages, charges or a lien on the debtors property are the secured

creditors. On the debtors bankruptcy he may

1. Rely on the security and not prove at all; or

2. Surrender the security and prove the full amount of the debt; or

3. Realise his security and prove for the balance if any; or

4. Estimate the value of his security and prove for the balance.

Under Section 40 B.A. a provision relating to the landlords power of distress, the position

is somewhat similar to that of a secured creditor. He is entitled to seize the goods of a

tenant in satisfaction of the rent due to him. In proving of debts the rules laid down in the

2nd schedule to the Bankruptcy Act must be observed.

ORDER OF PAYMENTS:

The Assets remaining after payment of the expenses properly incurred in preserving,

getting in and realising the assets of the bankrupt must be paid out in the following order of

priority:

1. Costs and Charges incurred in the administration of the Estate;

2. Preferential Debts;

3. Unsecured debts;

4. Deferred Debts;

5. If there is any surplus this is to be returned to the Bankrupt. Section 38-39 B.A.

Distribution 66-73 BA

SMALL ESTATES:

Under Section 120 if a petition is presented and the value of the debt is not more than

KShs. 12,000 the court may order that the debtors Estate be administered summarily

whereupon the provisions of the BA will apply subject to the following modifications.

1. Should the debtor be adjudged bankrupt, the official receiver shall be the Trustee in Bankruptcy;

2. There is no committee of inspection, everything is done by the official receiver;3. Everything else may be modified to simplify the procedure except for the

provisions relating to examination and discharge of the debtor.

HIRE PURCHASE

The Kenyan Hire Purchase Law is governed by the principles of the English common law

as modified by the Hire Purchase Act Cap 507 of the Laws of Kenya. At common law a

hire purchase agreement is defined as a contract for the delivery of goods under which the

Hirer is granted an option to purchase the goods. The agreement is a hybrid form of

contract in that it is neither a simple bailment nor a contract of sale but combines elements

of both.

The original position at common law is that there are no formal requirements for a hire

purchase agreement. An oral agreement is valid and binding. The question of capacity to

enter into Hire Purchase Agreement is governed by the normal rules of contract law.

because the Hire Purchase Agreement is a form of bailment, it only applies to goods as

defined in the Sale of Goods Act. The terms of a Hire Purchase Agreement must be stated

with certainty and precision so as to enable the court to ascertain the intention of the

parties. The parties to the agreement must reach consensus ad idem.

If the dealer fraudulently completes a document signed in blank by the hirer, then no valid

hire purchase contract results. Should the nature of the document which the hirer signs be

misrepresented to him so that he signs in the belief that it is something essentially different

from what it is the hirer can plead non est factum (it is not my deed or it is not my act) and

therefore escape liability. If there is a change in the condition of the goods between the

time of the offer and acceptance, again no valid agreement comes into force.

In the case of an agreement between the dealer and the hirer without the intervention of a

finance company, a legally binding hire purchase agreement comes into existence when the

dealer posts a letter of acceptance to the hirer or delivers the goods.

Where the finance company finances the transaction, although the dealer is supplying the

goods, the owner of the goods at the relevant time is a finance company. The hirer

therefore contracts with a finance company when he enters into a hire purchase agreement.

Thus there must be acceptance by the finance company and communication of that

acceptance to the hirer which is normally done by posting him a copy of the agreement

showing execution by the company.

A hire purchase transaction has been described as a triangular transaction with the Dealer

and the Hirer at the bottom and the Finance company at the top.

The question arises as to the effect of the delivery of goods by the dealer to the hirer before

acceptance by the finance company. As far as the obligations of the hirer are concerned,

until acceptance of his proposal by the finance company the hirer holds the goods as a

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