At times, we have heard of individuals and companies being declared bankrupt, prompting the courts to officially recognize them as bankrupt and insolvent. But what does bankruptcy actually mean, and how can one file for it?
Bankruptcy is a legal state where an individual or company is unable to pay their debts as and when they fall due. This is different from insolvency, which refers to the general inability to meet financial obligations.
It’s important to note that while someone can be insolvent but not bankrupt, they cannot be bankrupt without being insolvent.
Bankruptcy offers a fresh start by allowing individuals to discharge the debts they declared at the time of entering into bankruptcy. It provides legal protection from creditors, barring them from pursuing debt recovery.
In Kenya, bankruptcy proceedings are governed by the Insolvency Act, 2015, and its Regulations. The High Court holds the jurisdiction to hear and determine bankruptcy matters. Under this law, a debtor, whether an individual or a company, can apply to the court to be officially declared bankrupt.
Companies, too, may file for bankruptcy if their debt burden becomes insurmountable. In such cases, they go to court seeking protection from harassment by creditors.
The Process of Filing for Bankruptcy
Section 32 of the Insolvency Act states that a debtor may file a Bankruptcy Petition in court to be adjudged bankrupt. The process begins when the debtor files this petition, either personally or through an advocate representing them.
The parties involved in bankruptcy include:
- The debtor, the person who owes the debt.
- The creditor(s), the person(s) to whom the debt is owed.
- The trustee, the person in charge of dispersing the debtor’s property for the benefit of the creditors.
- The bailiff, responsible for executing all procedures.
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The debtor presents the following documents to the Official Receiver for approval and confirmation that they have complied with the requirements of the Act:
- Bankruptcy Petition – Form No. 10
- Supporting Affidavit – Form No. 8
- Application for Bankruptcy Trustee – Form No. 9
- Statement of Affairs – Form 11
Once the Official Receiver confirms compliance, the debtor makes a statutory payment of Ksh 30,000 to the Official Receiver, who then issues a Certificate of Compliance related to the petition.
The debtor proceeds to file all the aforementioned documents at the High Court within their jurisdiction, paying court filing fees.
Afterwards, the Deputy Registrar of the Court reviews the documents to confirm compliance before certifying the matter for a hearing before a Judge.
Prior to the hearing, the debtor must publish a Notice of the Bankruptcy Petition in widely circulated newspapers, allowing creditors to file responses if necessary.
Under Section 34 of the Act, the matter proceeds for hearing, and the court makes a determination on whether or not the debtor should be adjudged bankrupt based on the evidence presented.
Conduct of Bankruptcy
If the court issues the Bankruptcy Order, the debtor is declared bankrupt for three years. Once a Bankruptcy Order is made, all proceedings to recover the bankrupt’s debts are stayed.
The bankrupt’s property, including any rights to that property, is vested in a Bankruptcy Trustee, who takes over management of the debtor’s estate.
He or she carries on the bankrupt’s business (if any) for the benefit of the creditors; and assist in administering the bankrupt’s estate in such manner and on such terms as the bankruptcy trustee may direct.
The Official Receiver or a licensed Insolvency Practitioner can be appointed as the Bankruptcy Trustee to oversee this process.
Within thirty (30) days after the Bankruptcy Order is made, the Official Receiver should publish a notice advertising the order once in the Gazette, and once in the newspaper of wide circulation. Also Read:
The Official Receiver convenes the first meeting, and subsequent meetings depend on the outcome. If no request is received within 14 days, no meeting is held. Creditors can accept a composition to settle debts, subject to court approval. Once approved, it becomes binding.
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What Happens After Three Years
Additionally, the Trustee can summon the bankrupt or other persons for examination before or after discharge. A public examination may occur before the discharge order is made.
The trustee distributes the bankrupt’s estate according to the Act’s schedule, with creditors required to file proof of debt. Final dividends may be declared, or the trustee may state no further dividends will be issued.
A final creditors’ meeting is held once the trustee believes the estate administration is complete. Creditors review the trustee’s report and decide whether the trustee should be discharged.
Pursuant to section 254 of the Insolvency Act, the bankrupt gets an automatic discharge after three (3) years; the bankrupt may also apply to be discharged earlier.
However, a bankrupt is not automatically discharged if the Bankruptcy Trustee or a creditor has objected under Section 256 of the Act and the objection has not been withdrawn by the end of the three-year period.
Impact of Bankruptcy
Once a debtor is declared bankrupt, they face several legal disabilities. For example, the bankrupt cannot act as a director of a company or participate in its management, unless the court grants permission.
Under Section 99(2) (f) of the Constitution of Kenya 2010, a bankrupt person is disqualified from being a member of parliament.
The bankrupt cannot act as an advocate under Section 32 of the Advocate’s Act Cap 16 of the Laws of Kenya.
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