a) Bankruptcy is a legal status which a person (not a company) acquires when the court makes an adjudication order against him. The order effectively deprives him of the ownership of all his property (with certain exceptions) and subjects him to certain disabilities.
b) Insolvency refers to the inability of a person (including a company) to pay debts as and when they fall due. However, although a debtor may be insolvent, he is not a bankrupt until and unless the court adjudges him to be so.
Objects of bankruptcy laws
The principal objects of the law relating to bankruptcy are as follows.
a) To ensure that the debtor's property is distributed equitably among his creditors. (In this context equitable is not the same as equal; certain creditors are entitled to be paid in full before the other creditors receive anything from the state).
b) If the court agrees, to grant the bankrupt a discharge, thereby freeing him from any further liability for past debts. (Note, Section 7 of the Bankruptcy Act provides for the automatic discharge of a bankrupt, at the end of five years from the day he was first adjudged bankrupt, if he has not obtained his release before then.
c) To examine the debtor in order to see if he has committed any offence, and to punish him in appropriate cases. This procedure is therefore a protection for creditors and other members of the public who might subsequently have become creditors.
Who can be made bankrupt?
A debtor who:
a) Has committed or suffered an act of bankruptcy within the three months immediately preceding the presentation of a petition seeking to have him made bankrupt;
b) Owes liquidated debt (or debts) of at least Shs. 1,000/= to the presenter(s) of the petition, such (debts) being due both at the relevant act of bankruptcy and at the date of the petition's presentation; and
c) Is domiciled in Kenya or, within the year prior to the petition, was resident or carried on a business (personally or through an agent) in Kenya.
Procedures in Bankruptcy
Procedure in Outline
The following are the summarised steps in a typical bankruptcy:
A) An act of bankruptcy committed or suffered by the debtor;
b) Lodgement of a petition (by a creditor or by the debtor itself);
c) The issue of a receiving order against the debtor by the court;
d) The appointment of the official receiver;
e) The private examination of the debtor;
f) Preparation of a statement of affairs and deficiency account by or on behalf of the debtor;
g) The first meeting of creditors;
h) (Occasionally) a scheme of arrangement or composition prepared by the debtor;
i) The public examination of the debtor (unless excused by the court);
j) An adjudication order against the debtor (making him a bankrupt);
k) The appointment of a trustee in bankruptcy to deal with bankrupt's property;
l) The trustee's duties, powers and responsibilities;
m) Proofs and proxies;
n) The realisation of assets by the trustee;
o) Payments to creditors;
p) The discharge of the bankrupt;
The Official Receiver
a) The official receiver is appointed, removed and controlled by the Court and is an officer of the court to which he is attached.
b) He becomes receiver of the debtor's property when the receiving order is made. He also acts as trustee in bankruptcy:
i. In small bankruptcy (unless the creditors want someone else as trustee);
ii. during a vacancy in the office of trustee;
iii. When a trustee is released;
iv. In bankruptcy proceedings under penal code;
v. in the administration of the estate of a deceased insolvent (unless and until creditors appoint their own trustee;
vi. In a composition or scheme or arrangement until a trustee is appointed (and during any vacancy).