What Alternatives are there to Bankruptcy?
Bankruptcy simply refers to the condition of a person who is unable to pay his/her debts as and when they fall due. According to the Insolvency Act (hereinafter “the Act”), it can only occur upon the Court making an order adjudging the debtor bankrupt after considering an application for a bankruptcy order which application can be filed by either of the following; the debtor, creditors of the debtor, or by a supervisor of the debtor’s voluntary arrangement. The party applying to court for bankruptcy is required to prove to Court that indeed the debtor is not able to pay his debts to warrant the making of a bankruptcy order.
The Act offers alternatives to bankruptcy, which this article will address. In the lead up to addressing this however, we shall also answer the following two questions to give a better understanding on bankruptcy: Who can be adjudged bankrupt? What limitations are imposed on a debtor upon being adjudged bankrupt?
Who can be adjudged bankrupt?
An application for a bankruptcy order can only be preferred against Kenyan residents. However, the same can be preferred against persons who are not Kenyan residents but who were for the last three (3) years preceding the filing of the application either Kenyan residents, had a place of residence in Kenya or carried business in Kenya. Also, for the Court to make an order adjudging the debtor bankrupt, the Court has to be satisfied that the debtor is not able to pay his debts and that in the circumstances, it is just and equitable to make the bankruptcy order.
Further to the foregoing, whereas a creditor who files for bankruptcy against a debtor has to satisfy that the debt owed is equal to or exceeds KShs. 250,000, a debtor who brings an application to be judged bankrupt has to satisfy that if a bankruptcy order were made, the value of his unsecured debts would not be less than KShs. 100,000 and that the value of his estate would be equal to or more than 500,000.
Restrictions imposed on a person adjudged bankrupt
Upon being adjudged bankrupt, the Insolvency Act, 2012 and Companies Act, 2015 imposes limitations on a bankrupt. Notably, the Insolvency Act provides that a bankrupt cannot without the consent of the Court or the bankruptcy trustee inter alia:
- enter into, carry on, or take part in the management or control of any business;
- be employed by a relative of the bankrupt; or
- be employed by a company, trust, trustee, or incorporated body that is owned, managed or controlled by a relative of the bankrupt.
In addition, Section 223 of the Companies Act makes it an offence for an undischarged bankrupt to participate in the promotion, formation or management of a company and/or act as a sectary or director of company without leave of Court. Section 224 further provides that a person who offends section 223 and engages in either of the foregoing without the Court’s leave shall be personally liable for the company’s debts.
The restrictions imposed on a bankrupt are clearly grave and far reaching, therefore, before making an application for a bankruptcy order, the debtor ought to consider these restrictions vis-a-vis the benefits that would follow upon being adjudged bankrupt.
Alternatives to Bankruptcy
The foregoing notwithstanding, the Act offers alternatives to bankruptcy that grants debtors an opportunity at organizing their financial affairs and get a fresh start.
Simply put, this is an agreement entered into between creditors and a debtor to settle the debts in a specified period and a specified manner. The debtor comes up with the proposal and presents it to the creditors for their approval. The whole process is done under the supervision of the Court. The debtor is also obligated to ensure that the proposal provides for a person to act as supervisor of the proposed voluntary arrangement who should be a qualified insolvency practitioner.
Once this process is kick started, the debtor can make an application in Court for an interim order staying any execution processes against him, pending the consideration of the proposal by his creditors. If the Court is satisfied that it would facilitate the consideration and implementation of the debtor’s proposal, it will grant the interim order. The order however ceases to have effect at the end of fourteen days from the date on which the orderwas made as was affirmed by the court in the case of Rajendra Ratilal Sanghani v Schoon Ahmed Noorani  eKLR.
Upon grant of the interim order, the provisional liquidator is required to prepare a report as to the prospect of the proposal being approved and implemented and whether he is of the opinion that a meeting of the debtor’s creditors should be convened to consider the proposal and submit it to Court. If the provisional liquidator makes the foregoing finding, a creditors’ meeting is convened to consider the proposal and if approved, it takes effect as a voluntary arrangement. Following which, the provisional supervisor becomes the supervisor of the arrangement.
This is substantially similar to the voluntary arrangement. However, a debtor qualifies to apply for this if he is an undischarged bankrupt, the proposal to the creditors states that the Official Receiver will be the supervisor and no interim orders has been made like in the case of voluntary arrangement above.
The debtor is required to submit an official document setting out the debtor’s proposal to the Official Receiver (OR) who if upon considering the proposal forms an opinion that it has a reasonable prospect of being approved and implemented, the OR shall convene a creditor’s meeting in which the proposal is either approved or rejected. If approved, the same takes effect as a voluntary arrangement.
The Act defines summary installment as an order made by the Official Receiver directing the debtor to pay his debts either in instalments or in some other way, or in full, or to the extent that the Official Receiver considers practicable in the particular circumstances of the case. An application to the Official Receiver for the order is made by either the debtor or a creditor with the consent of the debtor.
Notably, the Official Receiver can only make a summary installment if satisfied that the debtor’s total unsecured debts do not exceed KShs. 500,000 and that the debtor is unable to immediately pay those debts. The period for payment of installments should also not exceed three (3) years or if justified by special circumstances five (5) years.
This applies to a debtor who has no realizable assets, has not previously been admitted to the no asset procedure or previously been adjudged bankrupt. In addition, the total debts should not be less than KShs. 100,000 and not more than KShs. 4,000,000 and the debtor should not have the means to repay any amounts towards the debts.
The above notwithstanding, the debtor is obligated to notify the Official Receiver as soon as practicable after any change occurs in the debtor’s circumstances that would allow the debtor to repay an amount towards the debts.
The debtor can however be disqualified from entry into the no asset procedure in circumstances where the Official Receiver is satisfied that the debtor has either; concealed assets with the intention to defraud his creditors; he has engaged in conduct that if he were adjudged bankrupt it would amount to an offence; he incurred the debts knowing that he does not have the means to repay and where a creditor intends to apply for the debtor to be adjudged bankrupt, if the debtor were to be adjudged bankrupt, the outcome for the creditor would be materially better as compared to the no asset procedure.
- Voluntary arrangement
- Expedited Procedure
- Summary Installment Order
- No-Asset Procedure
Courts have held that where an application for bankruptcy is filed against the debtor by the creditors, for the debtor to avail himself or herself to the alternative remedies available, a debtor must demonstrate that it has the ability to pay the debts or that it is not just and equitable for the Court to make a bankruptcy order as envisaged under the Act. The foregoing was affirmed in the case of Diamond Hasham Lalji v Cargill Kenya Limited  eKLR.