Widgets

THE ACTS OF BANKRUPTCY

These are basically covered under Section 3(1) BA.  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 of the whole or substantially the whole of the debtor’s property.  Refer to Re Spackman (1890) 24 QBD 128. The assignment must be for the benefit of all creditors generally and not just a class.  Refer to Re Meghji Nathoo (1960) E.A. 560  A creditor who has recognised a Deed of Arrangement wherein a debtor has agreed on a plan of repaying the debt cannot rely on that Deed as an act of bankruptcy.  Refer to Re A Debtor (1939) 2 All E.R. 338

2. Fraudulent Conveyance

provided for under Section 3(1)(b) of the BA  this second act of bankruptcy is that if a debtor makes a fraudulent conveyance, gift, delivery or transfer of his property or any part thereof.  Under the BA 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 debtor’s family.  The conveyance need not be of the whole of the debtor’s property.

Fraudulent Conveyance:

The principles for determining whether a conveyance is fraudulent under the Bankruptcy Act may be summarised as follows: -

1.            Where a debtor transfers all or virtually his assets in payment of an antecedent debt without receiving any present return for them this necessarily defeats or delays his other creditors and is a fraudulent conveyance even when the transaction is honestly entered into;

2.            Where a debtor transfers all his assets for a full present consideration this is not per se a fraudulent conveyance since the effect is merely to change the nature of the property to which the creditors look for satisfaction but a fraudulent intent for example to abscond with the proceeds of the sale could be proved if it is in fact existed or it might shown that that so called sale was a sham designed to turn a creditor from an unsecured into a secured creditor at the expense of other creditors and in this latter case that will be fraudulent.

3.            Where a debtor transfers part of his assets in payment of an antecedent debt, the fraudulent intent must be proved and this will depend upon whether or not there is sufficient property remaining after the transfer to enable the debtor to continue in business and thus satisfy his other creditors.  Secondly this will depend upon whether the debtor is insolvent or not at the time and lastly it will depend upon whether or not the conveyance has the effect of leaving him insolvent.

4.            Where a debtor mortgages or otherwise charges all his property to secure an antecedent debt, this is conclusively presumed fraudulent as against the other creditors.


3.   FRAUDULENT PREFERENCE:

Section 3 (1) (c) of the BA 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 which would under the BA or any other Act be void as a fraudulent preference if you are adjudged bankrupt, this constitutes an act of Bankruptcy and basically 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

BA 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 or departing from a dwelling house or 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 debtor’s 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 debtor’s act that the creditors will be defeated or delayed.  Refer to the case of Re Cohen (19500 2 All ER 36

This act of bankruptcy has 3 limbs

  1. 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.  However, this is not so if he has a permanent residence abroad at which he remains or if a person domiciled abroad leaves Kenya to return to the country of his domicile.  Refer to Ex parte Brandon (1884) 25 Ch. D 500 

b. The second limb of bankruptcy is departing from a dwelling house or otherwise absenting himself. Here the absenting must be from the debtor’s 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 husband’s request to live with him elsewhere.

c. 3rd Limb of bankruptcy is 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.

5.         LEVYING EXECUTION AGAINST GOODS

Section 3(1)(e) of the Bankruptcy Act, where a judgment against a debtor remains unsatisfied, the judgment creditor will usually seek to enforce it by levying execution on the debtor’s 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.  Refer to the case of Re Beeston (1899) 1 QB 626.  The Bailiff is in possession for the purpose of this section where under a ‘walking possession’ agreement he withdraws his officer upon the debtor’s acknowledging that the goods have been seized and allows the debtor to continue normal trading in the goods provided that a limit is imposed on the value of the goods which can be dealt with in this way by the debtor. Refer to the case of Re Dalton  (1963) Ch. 336. 


Execution against Goods.
If a 3rd party makes a claim to any of the goods seized, the bailiff must take out an inter pleader summons to determine the ownership of the goods.  The period occupied in dealing with these summons is not to be counted in the 21 days.

6.         DECLARATION OF INABILITY TO PAY DEBTS

B A 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.  A declaration of inability to pay debt is required to be in Form No. 2 of the Bankruptcy Rules while a debtor’s petition is required to be in Form No. 3 of the Bankruptcy Rules.

7.         BANKRUPTCY NOTICE
Section 4 as read with Section 3(1) g of the BA.  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 judgment debtor calling upon the debtor to pay the amount of the judgment 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 notice must require payment to be made in exact accordance with the terms of the judgment.  Therefore if by agreement with a creditor payment is to be made by instalments, a notice cannot issue on the failure to pay one instalment for the whole of the unpaid balance unless it was provided that the whole balance should become due on failure to pay any instalment.  If a portion of the judgment debt has been paid, there not being any agreement to take payment by instalments, the bankruptcy notice must issue for the balance unpaid and not for the whole debt.

But a bankruptcy notice will not be invalidated by reason only that the sums specified in the notice as the amount due exceeds the amount actually due unless the debtor within the time allowed for payment gives notice to the creditor that he disputes the validity of the notice on the ground of such misstatement.  If the debtor does not give such notice he is deemed to have complied with the bankruptcy notice if within the time allowed he takes such steps as would have constituted a compliance with the notice had the actual amount due been correctly specified therein.  It should be noted that two separate judgment debts cannot be included in one notice.

A bankruptcy notice cannot be issued if execution on the judgment has been stayed.  The debtor after service of the notice may seek to have it set aside if he has a counter-claim, set-off 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.

8.         GIVING NOTICE TO CREDITORS OF SUSPENSION OR INTENTION TO SUSPEND DEBTS

Section 3(1) (h) BA.  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 or about to suspend payment.  That will constitute an act of bankruptcy for example notice of Suspension has been inferred where a trader summoned a meeting of his creditors with a view to proposing a composition.  Refer to 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.   In Re Daintrey [1893] 2 Q.B. 116.

 
 
 

Like Us on Facebook

Contact Form

Name

Email *

Message *