Bankruptcy refers to the state where a debtor is unable to pay their debts when the debts become due. For a person to be bankrupt there must be an order by the court stating that they are unable to pay their debts.
Who can apply for a bankruptcy order?
Either the debtor or the debtor’s creditor(s) may apply to court for the issuance of bankruptcy Order.
What conditions must be met for the court to issue bankruptcy order?
Where the application for bankruptcy order is made by a debtor, they must satisfy the court that:
- They are either domiciled in Kenya, personally present in Kenya or three years preceding the date of the application they have been ordinarily resident or carried business in Kenya.
- Their debt meets the minimum prescribed threshold
- They have not previously been adjudged bankrupt
- They are not in the process of being adjudged bankrupt
When the application for bankruptcy order is made by creditor(s), they must satisfy the court that:
- The debtor is either domiciled in Kenya, personally present in Kenya or three years preceding the date of the application they have been ordinarily resident or carried business in Kenya.
- The debtor owes them a sum of money equal to or above the prescribed threshold
- The debt is for a liquidated amount payable to the applicant creditor(s) either immediately or at some certain future time, and is unsecured
- The debt is one that the debtor appears to be unable to pay or to have no reasonable prospect of being able to pay
- There is no outstanding application to set aside a statutory demand in respect of the debt
- They have given a notice of not less than twenty one days seeking payment of debt due immediately and the duration has lapsed without being paid
- They obtained Judgment, served it on the debtor and after 21 days the decretal sum has not been paid
- They have served on the debtor a demand requiring the debtor to establish to their satisfaction that there is a reasonable prospect that the debtor will be able to pay a debt payable in future, when it falls due and 21 days have lapsed without the demand being complied with or set aside.
Upon being satisfied that the above conditions have been met, the court issues a bankruptcy Order.
Can court issue a bankruptcy order on an application by secured creditors?
Court can make bankruptcy order on application by secured creditor(s) only when:
- The application contains a statement by the person having the right to enforce the security that the creditor is willing, in the event of a bankruptcy order being made, to give up the security for the benefit of all the bankrupt’s creditors; OR,
- The application is expressed not to be made in respect of the secured part of the debt and contains a statement by that person of the estimated value at the date of the application of the security for the secured part of the debt.
Under what circumstances can court dismiss an application for bankruptcy order?
The Court may dismiss an application if it is satisfied that either the debtor is able to pay all of the debtor’s debts; OR—
- That the debtor has made an offer to secure or compound for a debt in respect of which the application is made
- That the acceptance of that offer would have required the dismissal of the application; and
- That the offer has been unreasonably refused.
What are the consequences of a Bankruptcy Order?
- Where a trustee in bankruptcy has been appointed, the property of the bankrupt vests in the trustee. If no trustee has been appointed, the property of the bankrupt will vest in the Official Receiver to act as the interim trustee.
- The bankrupt suffers all the disabilities of law for instance: they cannot run for elected positions, they can’t directors of a company, they can’t file suits in their own name, and they can’t enter into contracts.
- No civil proceedings can be instituted or continued against the bankrupt once the order is made
- The bankrupt has an obligation to provide a true and accurate account of all his assets, income and liabilities
- The official receiver is entitled to recover assets that the bankrupt has transferred within two years immediately preceding the bankruptcy.
- Does not extinguish debts of a bankrupt but only protects them from creditors commencing recovery proceedings without leave of court.
