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APRI L 2011

1. Discuss the interrelationship between bankruptcy and commercial


Some people have a Dickensian view of bankruptcy and view it as a system whereby a man is
suddenly deprived of everything he owns which is then sold with a view to paying off his
creditors, leaving the Bankrupt and his family destitute, and consigning him to a life of
everlasting poverty and shame. This does not reflect the modern-day realities. While the law and
system of bankruptcy seeks to provide a means whereby creditors can recover ratably or equally
among themselves, they also grant a measure of protection for the bankrupt, and ensure that the
bankrupt cannot be proceeded against to the benefit of one creditor and to the detriment of
another. Bankruptcy may be defined in different ways. One may define it in terms of its purpose,
that is, a system whereby the assets of a debtor are distributed equitably among his creditors. The
classical definition of bankruptcy is considered to be a quotation from an English case in 1874,
I n re Reiman Fed Cas No. 11, 673: 20 Fed Cas 490, 494 (1874): Bankruptcy is a law for the
benefit and the relief of creditors and their debtors, in cases in which the latter are unable or
unwilling to pay their debts. It has also been described as a cessio bonorum for the benefit of
all of the creditors of the person who makes that cesser.In re James, Clutterbuck v. James
(1890), 62 LT 454, per Kekewich J, at 455.
What then are securities?

What is commercial security? This is a form of an agreement to secure the
performance of an obligation, usually the payment of debt. It gives the beneficiary of the
of the security interest certain preferential rights in the disposition of secured assets. Such
rights vary according to the type of security interest but in most cases, a holder of the
security interest is entitled to seize, and usually sell, the property to discharge the debt
that the security interest secures.
Two types of security exist:
1. Real security:> This entails the right that a creditor has over the property of the debtor
should the debtor default on the payment. Real security gives the holder of that security
a proprietary claim over the assets of the debtor in order to secure payment.
2. Personal security:> This entails a situation where a third party who isnt part of the
original contract between debtor and creditor enters a separate contract with the
creditor in which he assumes liability to pay the debt of the debtor should he default on
A creditor who has a security is known as a secured creditor while a creditor who
has no security is known as an unsecured creditor.
Commercial securities have a clear inter relation with bankruptcy where:
1. In relation to the distinction between a secured creditor and an unsecured creditor
a secured creditor is any creditor that takes collateral for the extension of credit, loan or bond
issuance. Secured creditors have most senior protection in bankruptcy, since they have
specific assets that collateralize their loans. Secured creditors also generally have the right to
re-posses or foreclose on the property against which a lien is held when the borrower is in
default. This advantages are not available to the unsecured creditor thus a distinction is

2. In relation to the statement of affairs of the debtor

Section 16. (1) of the bankruptcy act , The debtor shall make out and submit to the official
receiver a statement of and in relation to his affairs in the prescribed form, verified by affidavit,
and showing the particulars of the debtors assets, debts and liabilities, the names, residences and
occupations of his creditors, the securities held by them respectively, the dates when the
securities were respectively given, and such further or other information as may be prescribed or
as the official receiver may require. This is further seen in bankruptcy form no. 3 which is the
statement of affairs were the securities of the creditors is shown.
The identification of securities in the debtors statement of affairs helps the creditors as well as
the court in identifying the debtors financial standing or state. The statement of affairs is also a
requirement for a public examination of the debtor as seen in section 17 and refusal to submit
securities held by debtors is against the rule of a public exam.
3. In relation to scheme of arrangement
In section18. (1) of the bankruptcy act ,Where a debtor intends to make a proposal for a
composition in satisfaction of his debts, or a proposal for a scheme of arrangement of his affairs,
he shall, within four days of submitting his statement of affairs, or within such time thereafter as
the official receiver may fix, lodge with the official receiver a proposal in writing, signed by him
or by an agent specifically authorized by him for the purpose, embodying the terms of the
composition or scheme which he is desirous of submitting for the consideration of his creditors,
and setting out particulars of any sureties or securities proposed.
This is where the debtor by his application proposes a scheme of arrangement to avoid being
adjudged bankrupt. He has, according to section 18 (1) of the bankruptcy set out any sureties and
securities involved in the scheme of arrangement for the creditors to accept or refuse. Without

these discloser, a scheme of arrangement is incomplete and in danger of being rejected by the

4. In relation to realization of property
In section 53(5) of the bankruptcy act: Subject to the provisions of this Act with respect to
property acquired by a bankrupt after adjudication, any treasurer or other officer, or any banker,
attorney or agent of a bankrupt, shall pay and deliver to the trustee all money and securities in his
possession or power as officer, banker, attorney or agent and which he is not by law entitled to
retain as against the bankrupt or the trustee; and, if he does not, he shall be guilty of a contempt
of court, and may be punished accordingly on the application of the trustee.
This imposes any agent of the bankrupt whether financial or legal an obligation to deliver to the
trustee all moneys and securities and restricts these agents of the bankrupt from retaining these
assets where refusal to comply to these leads to contempt of court.
5. In relation to remuneration of and costs and the secured creditor.
In section 84. : (1) Where the creditors appoint any person to be trustee of a debtors estate, his
remuneration (if any) shall be fixed by an ordinary resolution of the creditors, or, if the creditors
so resolve, by the committee of inspection, and shall be in the nature of a commission or
percentage, of which one part shall be payable on the amount realized by the trustee, after
deducting any sums paid to secured creditors out of the proceeds of their securities, and the other
part on the amount distributed in dividend.
This section protects securities of a secured creditor from being used to pay costs to a
trustee.This security of the secured creditor remains untouched in remunerations and costs.
6. In relation to the bankruptcy contingency fund

In section 92(3) of the bankruptcy act: The Bankruptcy Contingency Fund Board may in its
discretion invest any money paid to the credit of the fund in any securities in which a trustee is
authorized to invest under trustee act.
Whenever the cash balance standing to the credit of the bankruptcy estates account is in excess
of the amount which , in the opinion of the official receiver, is required to meet demands in
respect of bankrupts estates,the board is allowed to invest the money or security.


These are covered under Section 3(1) bankruptcy act. 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 as seen in Re Spackman (1890) 24 QBD 728
This act of bankruptcy has the role in a modern a bankruptcy regime of restricting creditors
from getting an illegal advantage since it is not given by the court. In Re Spackman (1890)
24 QBD 728, if a person who wants to avoid being bankrupt were to transfer and convey her
property to trustees for distribution to creditors, he seeks to do what would have happened if
he were adjudged bankrupt, this can be challenged since it is an arrangement not under the
supervision of the court and therefore an act of bankruptcy if it is for the benefit of the
2. Fraudulent Conveyance provided for under Section 3(1)(b) of the Bankruptcy act.
Thissecond 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 bankruptcy act, 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.
Under a modern bankruptcy regime where there is a balance of the interests of both the creditor
and the debtor, this act of bankruptcy provides this balance.To, the creditor, this act of
bankruptcy protects him from debtors who would fraudulently convey property to another to
avoid them from being in consideration for realization if the debtor becomes bankrupt as well as
protect creditors from other creditors who seek to gain advantage through fraudulent
To the debtor, this act of bankruptcy protects him from being unable to transfer his property
legally even when he has a debt since it only calls to attention fraudulent conveyance. In a
modern bankruptcy regime, this allows the debtor to be involved in transactions free from fraud.
3. Fraudulent preference:
Section 3 (1) (c) of the bankruptcy act 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 that would under the bankruptcy or any other Act be void as a fraudulent preference if
you are adjudged bankrupt, this constitutes an act of Bankruptcy and 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
Bankruptcy act 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, departing from a dwelling house, 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. As seen in the case of Re Cohen (19500 2 All ER 36
This act of bankruptcy can be seen in three ways:
i. 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.
ii. 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.

iii. 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.
In the modern era of bankruptcy, the recognition of this act restricts the debtor from escape from
the creditors in a time where movement of people has developed due to the evolving transport
sector. The debtor therefore is stopped from intentionally trying to defeat or delay his creditors
by this act .Even though he does not achieve the delay or defeat of his creditors ,the intention
creates an act of bankruptcy.
5. Levying execution against goods
Section 3(1)(e) of the Bankruptcy Act, where a judgment against a debtor has not been executed,
the judgment creditor will usually seek to enforce it by levying execution orders 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. As established in the case of Re
Beeston (1899) 1 QB 626.
The role of this act of bankruptcy is to protect other creditors who had not instituted civil
proceedings from an unworthy debtor as proved by a civil court. In a modern bankruptcy regime,
debtors have various creditors and this act of bankruptcy protects other creditors from judgement
creditors because the law in the modern era dictates that only the judgement creditor will receive
payments once execution is done .the act of bankruptcy is relevant to other creditors apart from
the judgement creditor by allowing the other creditors to institute bankruptcy proceedings from
this act.

This act of bankruptcy could also be relevant to a judgement debtor who would like to avoid the
more penal approach of civil proceedings against his debt unworthiness such as committal to
civil jail for the more modern bankruptcy regime which is reformist.
6. Declaration of inability to pay debts
Bankruptcy act 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.
In a modern bankruptcy regime, this act of bankruptcy introduces the petition for bankruptcy by
the debtor rather than the traditional and less modern petition by the creditor. This act allows the
debtor to bring a petition in order for him to experience the reformatory aspect of the bankruptcy
act such as clearing of the debts at the end of the bankruptcy process for him to state a credit free
7. Bankruptcy notice
Another act of bankruptcy is seen in Section 3(1) g of the Bankruptcy act. 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 debtor calling
upon the debtor to pay the amount of the 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 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 debtor after service of
the notice may seek to have it set aside if he has a counter-claim, setoff 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.
In the modern bankruptcy regime,this act of bankruptcy protects creditors from unwilling and
unco-operative debtors who refuse to comply with execution orders and is relevant since it
speeds up the execution of court judgements for the benefit of the creditors.
8. Giving notice to creditors of suspension or intention to suspend debts
Section 3(1) (h) of the bankruptcy act. 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.
This act of bankruptcy has the obvious role of making it easier for creditors to prove in court that
a debtor is bankrupt by showing the debtor cannot pay his debts. In 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.The act of bankruptcy is relevant in the modern
bankruptcy regime where time is of the essence and this act of bankruptcy is fast and easier to
prove since only intention is needed.
-Bankruptcy law and practice by Bill Holohan- B.C.L., LL.B., F.C.I.L.S., F.C.I. Arb., A.M.
Bankruptcy Act Cap 53 Laws of Kenya
Trustee Act Cap 167 Laws of Kenya
-Bankruptcy in East Africa by Ian McNeil
-Bankruptcy Law and Practice by Friedman
-The principles of Bankruptcy Law by Thomspson J.H.

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