BANRUPTCY NOTES

INTRODUCTION
A bankrupt is a person against whom an adjudication order has been made by the court primarily on the
grounds of his insolvency. Any person (other than a body corporate) can be made bankrupt (including in certain
cases, infants and persons of unsound mind) who:

(a) Has incurred liquidated debts of Shs 1,000 or more; and

(b) Has committed an act of bankruptcy within the three months preceding presentation of the petition;
and
(c) At the time the petition was presented was domiciled or within a year before, was ordinarily resident in
Kenya or carrying on business in Kenya personally or by an agent or as a member of a firm.

CAUSES OF BANKRUPTCY/REASONS FOR FINANCIAL DISTRESS

The principal factors influencing the probability of bankruptcy, ceteris peribus, could be
associated with the (1) Asset mix (2) financial structure (3) corporate governance.
(i)
The first cause of financial distress is the inappropriate allocation of assets. Assets
are usually industry specific a firm may be driven to bankruptcy if the resources are
not allocated efficiently. The resources mix between the long and short-ter m assets is
crucial in an efficient market.
(ii)
A firm bankruptcy might be financial. The firm has the right assets structure but
its financial structure is inappropriate hence liquidity constraints.
(iii)
Whereas the firm is viable in the long run, due to liquidity constraints it is has to
go to bankruptcy in the short run.
(iv)
Corporate governance may drive a firm into bankruptcy if the problem is not
resolved. Conflict of interest of the management and the owners. The owners of a
firm provide fund to be put the best use and managers utilize the resources as the
agents of the owners.

BUNKRUPTCY ACTS/ INDICATORS OF BANKRUPTCY

(a) Assignment of property to trustee: whereby one gives up all his property to be managed by a trustee
Provided that:

i. The assignment is of substantially the whole of the debtor's property, and

ii. It is for the benefit of the creditors generally.

Such an assignment will normally be void unless registered as a deed of arrangement.

(b) Fraudulent conveyance: the debtor unfairly transfers his property to one creditor, so that the other
creditors have no assets to attach their claims on.
i.e. a transfer of any property to any person which gives one creditor an unfair advantage, or which tends
to defeat or delay creditors.
(c) Fraudulent preference
Where the preference constitutes a conveyance or transfer of property, or a charge thereon,
(d) Absenting
i.e. departing or remaining out of Kenya, or departing from his dwelling-house, or otherwise absenting
himself, or 'keeping house', with the intention of defeating or delaying his creditors.
(e) Execution against goods
 This is committed when the bailiff has taken possession of goods and either sold them or retained them
for 21 days.
(f) Petition by debtor ( outright declaration that he is unable to pay)
A bankruptcy petition by the debtor against himself, or a formal declaration of his inability to pay his
debts filed with the court, operates as an act of bankruptcy.
(g) Non-compliance with bankruptcy notice
A bankruptcy notice may be issued by a judgement creditor in respect of a final judgment or order for any
amount provided that execution has not been stayed or already levied: failure by the debtor to pay the
amount of the judgment within seven days of service of the notice constitutes an act of bankruptcy,
unless the debtor applies to have it set aside on the grounds of set off, etc.
(h) Notice of suspension of payment of debts
This may be in any form provided it shows a clear intention to suspend payment.

THE PETITION (APPLICATION FOR BANKRUPTCY)

(a) Petition by debtor
If the debtor presents his own petition, a receiving order is made at once without a court hearing and an
adjudication order may also be made at once.
(b) Petition by creditor
Any creditor including an assignee of a debt, may petition, provided:

i. The debt due to him amounts to at least Shs 1,000;

ii. The debt is certain and is for a liquidated sum;
iii. The petition is based on an act of bankruptcy committed within the previous three
months.
iv. The debtor is domiciled in Kenya, or within the previous year has ordinarily resided or
carried on business in Kenya.

A creditor whose debt is less than Shs 1,000 may petition jointly with other, if the aggregate of the
debts is Shs 1,000 or more A secured creditor may only petition in respect of the balance unsecured
unless he agrees to surrender his security.

(c) Presentation and hearing procedures

The petition is presented to the court and must be served on the debtor at least eight days before the
hearing. If the debtor wishes to oppose it he must give notice of that fact and the reasons for his
opposition at least three days before the hearing. The court may dismiss the petition if the creditor fails
to prove

i. The debt
ii. Service of the petition on the debtor
iii. The act of bankruptcy relied on or
iv. If satisfied that the debtor can pay his debts, or for other sufficient cause.

Otherwise it may stay the proceedings on such terms as it thinks fit, or make a receiving order against
the debtor.

Protection of debtor’s property

At any time after presentation of the petition, the court may appoint the official receiver
(O R) to be interim receiver of the property and the O R may himself appoint a special manager. The
court may also stay any action or other legal process against the debtor.
The official receiver
The Official Receiver is an officer of the court appointed to investigate the debtor's conduct and report
thereon to the court, to act as receiver of the debtors property, summon and preside at the first meeting
of creditors, advertise requisite matters in the Kenya Gazette and elsewhere, and act as trustee pending
appointment of a trustee by the creditors and during any vacancy, and in small bankruptcies. He may
appoint a special manager to carry on the debtor's business until a trustee is appointed.