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BANKRUPTCY OR INSOLVENCY

Bankruptcy or insolvency is a legal status of a person or an organisation that


cannot repay the debts it owes to its creditors. If you are declared Bankrupt, the
responsibility for repaying your debts will be taken away from you by the Court.
You are protected by law from any further creditor action against you. For
example, your creditors are no longer allowed to contact you and demand
repayment of money. They are not allowed to add further interest or charges
and can not take any further action against you in the Court to recover money
they have lost
In law, liquidation is the process by which a company (or part of a company) is
brought to an end, and the assets and property of the company redistributed.
Liquidation is also sometimes referred to as winding-up or dissolution, although
dissolution technically refers to the last stage of liquidation.
When a business or firm is terminated or bankrupt, its assets are sold and the
proceeds pay creditors. Any leftovers are distributed to shareholders.
Creditors liquidate assets to try and get as much of the money owed to them as
possible. They have first priority to whatever is sold off. After creditors are paid,
the shareholders get whatever is left with preferred shareholders having
preference over common shareholders.
DEFINITION OF A BANKRUPT PERSON
A bankrupt person is one against whom an adjudication order has been made
by the court primarily on the grounds of his insolvency. Any person can be
adjudged bankrupt if;
1. Has incurred liquidated debts of sh 1,000 or more.
2. Has committed an act of bankruptcy within the three months preceding
the presentation of the petition.
Acts of bankruptcy
A debtor commits an act of bankruptcy in each of the following cases;
(a) Assignment of property to a trustee - if in Kenya or elsewhere he
makes a conveyance or assignment of his property to a trustee or
trustees for the benefit of his creditors generally;
(b) Fraudulent conveyance - if in Kenya or elsewhere he makes a
fraudulent conveyance, gift, delivery or transfer of his property, or of any
part thereof;
(c) Fraudulent preference - if in Kenya or elsewhere he makes any
conveyance or transfer of his property, or of any part thereof, or creates
any charge thereon, which would under this or any other Act be void as a
fraudulent preference if he were adjudged bankrupt;
(d) If with intent to defeat or delay his creditors he does any of the following
things, namely, departs out of Kenya, or being out of Kenya remains out of
Kenya, or departs from his dwelling-house, or otherwise absents himself,
or begins to keep house;
(e) Execution against the debtors goods - if execution against him has
been levied by seizure of his goods in any civil proceeding in any court,
and the goods have been either sold or held by the bailiff for twenty-one
days:
(f) Petition by the debtor - if he files in the court a declaration of his
inability to pay his debts or presents a bankruptcy petition against
himself;
(g) Creditor who has obtained a final decree or final order - if a
creditor has obtained a final decree or final order against him for any
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amount, and, execution thereon not having been stayed, has served on
him in Kenya, or, by leave of the court, elsewhere, a bankruptcy notice
under the Act.
(h) Notice of suspension on payment of debt - if the debtor gives notice
to any of his creditors that he has suspended, or that he is about to
suspend, payment of his debts.
Conditions on which a creditor may petition
A creditor shall not be entitled to present a bankruptcy petition against a debtor
unless (a) The debt owing by the debtor to the petitioning creditor, or, if two or
more creditors join in the petition, the aggregate amount of debts
owing to the several petitioning creditors, amounts to sh 1,000; and
(b) The debt is a liquidated sum, payable either immediately or at some
certain future time; and
(c) The act of bankruptcy on which the petition is grounded has occurred
within three months before the presentation of the petition; and
(d) The debtor is domiciled in Kenya, or within a year before the date of the
presentation of the petition has ordinarily resided, or had a dwelling-house
or place of business, or has carried on business, in Kenya, personally or by
means of an agent or manager, or is or within that period has been a
member of a firm or partnership of persons which has carried on business
in Kenya by means of a partner or partners, or an agent or manager.
DEBTORS STATEMENT OF AFFAIRS
The debtor should 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.
The statement shall be so submitted;
(a) Before, but not more than three days before, the date of the presentation
of the debtors petition, and, upon such submission, the official receiver
shall certify to the court under his hand that the statement has been duly
submitted to him;
(b) Within fourteen days of the date of the receiving order made on the
petition of a creditor, but the official receiver may, for special reasons,
extend the time.
In the case of a creditors petition, if the debtor fails without reasonable excuse
to comply with the requirements of this section he shall be guilty of an offence
and the court may, on the application of the official receiver or of any creditor,
adjudge him bankrupt and the debtor should, in addition to any other
punishment to which he may be liable, be guilty of a contempt of court and may
be punished accordingly.
Any person stating himself in writing to be a creditor of the bankrupt may,
personally or by agent, inspect the statement at all reasonable times, and take
any copy thereof or extract therefrom.
Provable and non provable debts
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Provable debts are those debts and liabilities to which the debtor is subject to at
the date of receiving the order or to which he may become subject before his
discharge by reason of any obligation incurred before the date of receiving the
order.
A non provable debt is that debt which is incapable of being fairly estimated.
ORDER OF PAYMENT/PRIORITY OF DEBTS
The bankrupts estate should be distributed in the following order;
1. Cost and charges cost and charges properly incurred in administering
the estate must be paid in priority to all debt, and in proper sequence.
2. pre-preferential debts these should be the next on line to be paid
they include;
- Premium paid by apprentices and articled clerks.
- Funeral and testamentary expenses for a deceased insolvent.
- Property of a friendly society of which the bankruptcy is an officer.
- Expenses properly incurred by a trustee.
3. preferential debt these include;
- Local rates and amounts deducted as PAYE during the 12 months
preceding the receiving order.
- Up to one year of any other assessed tax.
- Wages and salaries due to employees for work done during the 4
months preceding the receiving order up to sh 4,000 per employee.
- Rent due to the government for more than 5 years in arrears.
- Employers NSSF contributions during the past 12 months.
- Amounts due under workmen compensation act.
4. Unsecured debts these rank equally after payment of preferential debt
in full.
5. deferred debts these include;
- Accrued interest in excess of 6% P.A. due to unsecured creditor. This
should be paid in priority to other deferred creditors.
- Salaries and wages due to, money or any other property lent by a
relative.
- Loans to a person for business purposes at a rate of interest varying
with profits.
- Statutory interest at 6% P.A.
- Claims arising under a settlement set aside by the trustee.
6. Surplus any surplus remaining after payment of all debts and liabilities
in full must be returned to the bankrupt.
BANKRUPTCY OFFENCES
Section 138(1) of the bankruptcy act states that a bankrupt shall be guilty of an
offence in the following cases if;
1. he doesnt fully and truly disclose to the trustee all his property
2. He doesnt surrender all his property to the trustee.
3. He doesnt surrender to the trustee all books of accounts and other
relevant documents.
4. He fraudulently removes any of his property to the value of sh 200 or
more.
5. He makes any material omission in any statement relating to his
affairs.
6. He doesnt inform the trustee of a false claim by a creditor.
7. He continues to carry on business after being declared bankrupt.
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