INDIVIDUAL INSOLVENCY IN KENYA: AN OVERVIEW OF THE BANKRUPTCY ACT

AND THE INSOLVENCY BILLS OF 2010, 2012 AND 2014

AUGUSTUS MUTEMI*

Introduction

Bankruptcy law in Kenya has been progressively evolving since its first inception in 1930. The

Bankruptcy Act of 1930 which exists to date as Cap 53 Laws of Kenya borrows a lot from the

medieval English bankruptcy law. A number of bills have previously been prepared by the

Kenyan legislature but they hardly see the light of the day. These bills are the Insolvency Bill of

2008, the Insolvency Bill of 2010, the Insolvency Bill of 2012 and the Insolvency Bill of 2014

which is now pending enactment by the parliament.

The purpose of this paper is to critically analyze the salient features of these bills, the

innovations and reforms relating to individual insolvency as developed and cascaded

progressively through the four bills as contrasted and/or compared with the still applicable

Bankruptcy Act, Cap 53 Laws of Kenya.

Insolvency refers to the inability of a debtor to pay for his debts, as and when they

fall due. I n s o l v e n c y i s g e n e r a l l y a t e r m t h a t i s u s e d t o c l a s s i f y t h e i n a b i l i t y

o f c o m p a n i e s a s w e l l 1 a s individuals to discharge their financial obligations as

and when they fall due.

Insolvency is a t e r m w h i c h e n c o m p a s s e s b o t h c o m p a n i e s a n d i n d i v i d u a l s ,

t h o u g h t h e t e r m b a n k r u p t c y i s generally reserved for individuals in the Kenya.

*The author is a renowned researcher, currently finalizing training as a lawyer at The University
of Nairobi. See more of his writings at https://uonbi.academia.edu/MutemiMutemi
Of particular concern to this essay is that of individual insolvency law otherwise

commonly referred to as Bankruptcy. Bankruptcy is defined as the legal status of an individual

against whom an adjudication order has been made by the court primarily because of his inability

to meet his financial liabilities. Key to note is that the Adjudication Order is a judicial

declaration that the debtor is insolvent and it has the effort of imposing certain disabilities upon

him and divesting him from his property for the2 benefit of his creditors.

Bankruptcy must be distinguished from insolvency. Whether or not a person is

insolvent is purely a question of fact, thus a person can be insolvent without

being bankrupt but he cannot be bankrupt without being insolvent.

The salient features of the Kenya Insolvency Bills of 2008, 2010, 2012 and 2014 and the

Bankruptcy Act Cap 53 relating to individual insolvency

1. The nature of individual insolvency

Individual insolvency is discussed extensively under the 2012 and 2014 Insolvency Bills under

the similar heading “BANKRUPTCY OF NATURAL PERSONS”. Since the heading is worded

similarly in both bills, it will suffice to discuss the provisions in one of the bills. Section 13(1) of

the 2014 Insolvency Bill defines bankruptcy of natural persons to occur when a court makes an

order in respect of a debtor adjudging the debtor bankrupt. This is replicated verbatim by the

2012 Insolvency Bill of 2012 and the provision in the bill is also under section 13(1). Under the

two bills, the court can make such an order on two occasions. The first occasion is when there

has been an application of one or more creditors of the debtor to be adjudged as such by the court

and the second one is when the debtor himself has made an application to be adjudged as such

*The author is a renowned researcher, currently finalizing training as a lawyer at The University
of Nairobi. See more of his writings at https://uonbi.academia.edu/MutemiMutemi
under section 32 of the bill. Section 13(2) of the bills continues to state that upon being adjudged

bankrupt on the two occasions, there are two resultant scenarios. The first one is that the property

of the said person vests in the bankruptcy trustee or, if there is no bankruptcy trustee, the

property will vest on the official receiver.

The second scenario is that the person becomes restricted as to the business activities that the

person can undertake and the third scenario is that in cases where the property is vested on the

Official Receiver, such an official receiver is entitled to recover assets that the person who has

hitherto been adjudged bankrupt may have transferred within two years immediately preceding

the bankruptcy.

The Insolvency Bill of 2010 has almost the same provisions though the provisions are provided

for under section 12(1) of the same. The section discusses the effect of bankruptcy to have three

consequences, as provided for under the 2012 and 2014 Insolvency Bills. The Bankruptcy act

cap 53 Laws of Kenya does not have provisions regarding the nature of bankruptcy of natural

persons. Instead, the act stipulates under section 3 various acts of bankruptcy that would make a

person to be seen as bankrupt. Under that section, a debtor commits an act of bankruptcy when

they conduct themselves in a number of ways, inter alia, making a conveyance or assignment of

their property to a trustee or trustees for the benefit of their creditors generally, whether in Kenya

or elsewhere. Moreover, such a person commits an act of bankruptcy when they make a

fraudulent conveyance, gift, delivery or transfer of their property or of any part thereof whether

they are in Kenya or elsewhere. Such an act could also be departing out of Kenya, being out of

Kenya or remaining out of Kenya, departing out of their dwelling place or absenting themselves

with intent to defraud their creditors.

An act of bankruptcy under the Bankruptcy Act Cap 53 laws of Kenya could also be shown to

have been committed where execution has been levied against the person in question by seizure

of his goods in regard of civil proceedings in any court but such goods have either been sold or

held by the bailiff for a period of twenty-one days. The Act continues to define a debtor as any

person whether domiciled in Kenya or not but who at the time when the act of bankruptcy was

done or suffered by him was personally present in Kenya, ordinarily resided in Kenya, was

carrying on business in Kenya personally or by means of an agent or manager or was a member

of a firm or partnership which carried on business in Kenya.

2. Alternatives to bankruptcy

The 2010, 2012 and 2014 Insolvency Bills provides e similar provisions as alternatives to

bankruptcy. Under section 14 of the 2012 and 2014 Insolvency Bills, a debtor who is insolvent

has a number of options. He can enter into a voluntary arrangement with his creditors, he can

make a proposal to his creditors, and he can also pay his creditors in installments under a

summary order or even enter the “no asset procedure”. These provisions are provided for under

section 13 of the 2010 Insolvency Act. The Bankruptcy Act Cap 53 Laws of Kenya does not,

however, appear to have provisions for alternatives to bankruptcy. It is therefore germane that

the 2014 Insolvency Bill be enacted into law so that some of those deficiencies can be cured.

3. Applications to court

As stated earlier, a number of persons can make an application to court for a natural person to be

adjudged as bankrupt. Insolvency Bills of 2012 and 2014 provide under Division 2 and

specifically under section 17 one or more creditors may make an application to the court for a

bankruptcy order to be issued against a debtor in relation to a debt or debts owed by the debtor to
the creditor(s). This may happen if the creditor is able to prove that the debtor is unable to pay

the said debt. Inability to pay may be proved by showing that the creditor has served a demand to

pay against the debtor but twenty-one days have passed without the debtor complying with such

an order. It may also be the case where after a court suit, execution or any other process had been

issued in favour of the applicant and such an execution had either never been complied with or

had been complied with partially. Section 20(1) of both bills provides that the court will be

moved to grant the order when it is satisfied that the debtor has not been able to pay the creditor,

has neither secured not compounded the debt yet the days when the debt was supposed to be paid

have passed, or when the court is satisfied that the debtor has no reasonable prospects of paying

the debt. The debtor in question or any other creditor may challenge the application in the

relevant court with an aim of stopping the execution process against the debtor in respect of the

property of the debtor. This is provided for under section 22(1) of the 2012 and 2014 bills.

The court has the discretion of halting the application by the creditor on such terms and for such

period of time as it deems fit to do so. The court may also consider whether it is reasonable to

continue with an application before it where more than one application had been filed before it.

The court may also allow for the substitution of a creditor for another where the creditor who had

previously applied to the court had not proceeded with due diligence or that the hearing of the

application offers no evidence and also when the debtor owes the other creditor two hundred and

fifty thousand shillings or more. These provisions are only available in the 2012 and 2014

Insolvency Bills.

The other person who can make an application to the court seeking that the court declares the

debtor as bankrupt is the debtor himself. This happens where the debtor is unable to pay their

own debts. The debtor must however, in such a case, produce a financial statement showing the
particulars of his creditors and of the debtor’s debts and other liabilities and assets as may be

prescribed by the insolvency regulations and any other information that will convince the court

to grant the bankruptcy order. When the debtor makes such an application, he is expected to

publish a notice of the same in a daily newspaper that circulates generally in Kenya or the region

in which the debtor ordinarily resides and in such other publications(if any) that may have been

prescribed by any insolvency regulations in existence at the time of making the application. The

court can then an insolvency practitioner under section 33 of the 2012and 2014 Insolvency Bills

to inquire into the debtors financial affairs and also submit a report to the court within such

period as the court may specify. The report is supposed to state whether the debtor is willing to

make a proposal for a voluntary arrangement in accordance with division 1 of part IV dealing

with voluntary arrangements of natural persons. The application by the debtor can also be made

by two or more debtors who are partners in a business partnership. Under the 2010 bill,

application for adjudication of bankruptcy is provided for under section 47 while the application

by the creditor is provided for under section 35 of the Act. Under the current Bankruptcy act

which is still in force, the guidelines for the filing of the application by the creditor is provided

for under section 7 while the debtor’s petition is provided for under section 8 of the act.

4. The role of interim trustee in respect of debtor’s property

Under section 36 (1) of both the 2012 and 2014 bill, section 52 of the 2010 bill and section 10 of

the Bankruptcy Act Cap53 Laws of Kenya, the creditor whose application has been accepted by

the court may apply to the same court for an order for the appointment of an authorized

insolvency practitioner as interim trustee in respect of all or a specified part of the debtor’s

property. The court will then make such an order at any time before a bankruptcy order is made

in respect of the debtor. The role of the interim trustee includes inter alia, to take control of any
property of the debtor, to sell any perishable property or property of the debtor that is likely to

fall rapidly in value and also to control the affairs or property of the debtor as directed by the

court. Other people qualified to act as trustees under this provision are the Official receiver and

any qualified insolvency practitioner. The trustee must however under section 38(1) publish his

notice of appointment as soon as practicable in one or more newspapers circulating in Kenya or

in the region where the debtor ordinarily resides and in such other publication as may be

prescribed by the insolvency regulations in existence at the time of the bankruptcy of the debtor.

The court has the power to stay proceedings in any court in which the debtor is a party or allow

them to continue in such terms as it may deem fit.

5. Adjudication of bankruptcy by the court against the debtor as per the applications

Section 57 of the 2010 Insolvency Bill states that a bankruptcy commences on the date and at the

time when the court adjudges the debtor as bankrupt. In cases where the creditor(s) had made an

application for bankruptcy to the court, such a date will be marked by the day when the court

made such a declaration but in cases where the debtor himself had made an application to the

court to be adjudged bankrupt, the date will be when the official receiver makes such a

declaration in accordance with section 51 of the 2010 bill. Adjudication is binding unless

challenged in court. Upon adjudication, the Official Receiver usually nominates a trustee to be

the trustee of the property of the debtor. Section 64 on the other hand states that the trustee shall

advertise such adjudication in the Gazette and at least one daily newspaper with wide national

circulation within 7 days from the date of adjudication. The trustee may then call a meeting of

creditors of the bankrupt, during which time proceedings to recover debts shall be stopped. At

this time, the property of the bankrupt vests in the trustee. The trustee is also expected to
advertise in the prescribed manner the adjudication of the bankrupt as soon as it occurs. Such

advertisement may also not occur if the bankrupt challenges it in court.

6. The effect of commencement of bankruptcy

Section 48 of the 2012 and 2014 insolvency bills provide that after bankruptcy commences a

number of things happen. First of all, after receiving a notice of a bankruptcy order, the official

receiver is required to serve on the bankrupt a notice stating that a bankruptcy order has been

made in respect of the bankrupt, a notice requiring the bankrupt to lodge a statement of the

bankrupt’s affairs with the official receiver and a notice specifying a deadline for lodging the

statement with the official receiver. This statement of affairs must be lodged with the official

receiver within fourteen days after being served with the notice and must state, inter alia, the

particulars of the bankrupts assets, the bankrupts debts and liabilities, the names, residences and

occupations of the bankrupt’s creditors, the securities held by the bankrupt’s creditors, the dates

when such securities were given and such other information as may be prescribed by the

insolvency regulations or as the bankruptcy trustee may reasonably require. Section 50(2) of the

2012 and the 2014 insolvency bills states that a bankrupt who fails to abide by this provision is

held to be in contempt of court.

This is a feature that cuts across all the insolvency bills and also the Bankruptcy Act Cap 53 of

the Laws of Kenya. The provisions have been progressively enacted to provide for the

procedures of adjudication of a bankrupt and the processes that follow after such adjudication.

The official receiver also has the mandate to convene a meeting of creditors under section 52 of

the 2012 and 2014 bills and section 14 of the Bankruptcy Act cap 53 Laws of Kenya. The

meeting shall be convened subject to a number of factors that shall be considered when
determining whether or not to convene it. Some of the factors to consider are the bankrupt’s

assets and liabilities, the likely result of the bankruptcy and any other relevant matters. The first

creditors meeting are very crucial because the bankruptcy trustee may not sell any of the

bankrupt’s property before the meeting is held. However, he may do so if he is able to show that

the property is perishable, that in his opinion the sale of the property may be prejudiced by delay

or the expenses will be incurred by the delay. Before selling the property under these exceptions,

the trustee must however consult the creditors. Section 81 of the 2012 and the 2012 and the 2014

insolvency bill provides that there are two types of creditors’ meetings i.e. the first creditors’

meeting which is held after the trustee has been appointed and the subsequent creditors’ meeting

which follows the first creditors’ meeting. The trustee is at liberty to convene a meeting of

creditors after the first creditors’ meeting. The bankrupt may, if required by the trustee, attend all

creditors’ meetings and be questioned.

7. The status of the bankrupt’s property

This is provided for under section 98 of the 2010 insolvency bill and section 104 of the 2012 and

2014 insolvency bills which go hand in hand as per the provisions they have. Until the bankrupt

is discharged, whether in or outside Kenya, all property that the bankrupt acquires or that passes

to the bankrupt vests in the bankruptcy trustee without that trustee having to intervene or take

any other step in relation to the property and any rights of the bankrupt in the property are

extinguished. Furthermore, the powers that the bankrupt could have exercised in, over, or in

respect of that property for the bankrupt’s own benefit vest in the bankrupt’s trustee. Such

property includes property that is held in trust by the bankrupt for another person. The trustee

shall hold such property in trust for the benefit of the beneficiaries of the trust.
 8. The status of bankrupt’s property on second bankruptcy

Where a bankrupt is adjudged bankrupt for a second time before discharge, section 135(1) of the

2012 and the 2014 bills which go hand in hand in terms of the provisions and section 130 of the

2010 bill provide that the property that is acquired by, or has passed to, the bankrupt since the

first adjudication including property acquired or that has passed since the second adjudication

vests in the trustee in the second bankruptcy. However, the court may order that some assets or

their proceeds vest in the trustee in the first bankruptcy. Such assets include assets in the second

bankruptcy that in the opinion of the court were acquired independently of the creditors in the

second bankruptcy and assets in the second bankruptcy that devolved upon the bankrupt. The

section continues to provide that a surplus in the second bankruptcy is an asset in the first

bankruptcy and shall therefore be paid to the trustees in the first bankruptcy.

9. Duties of the bankrupt

Section 139 of the 2012 and the 2014 bills and section 132 of the 2012 bill outline some general

duties of the bankrupt. A bankrupt shall to the best of his ability assist in the realization of his

property and the distribution of the proceeds among the creditors. This is in addition to any other

duty imposed on the bankrupt by this Act or any other law. He shall also on the demand of the

trustee deliver so much of the property of the bankrupt that is divisible among the creditors and

that is under the possession of the bankrupt or control to the trustee or a person authorized by the

trustee to receive it. A bankrupt shall also on the demand of the trustee deliver to the trustee

deliver to the trustee or a person authorized by the trustee to receive it any property that is

acquired by or passes to the bankrupt before his discharge.

The bankrupt also has an obligation within fourteen days after acquisition notify the trustee of

any property that is acquired by or passes to the bankrupt before discharge and which is divisible

among the creditors. A bankrupt shall also take measures in relation to the property of the

bankrupt and the distribution of the proceeds that are required by the trustee, prescribed by rules

or regulations made under the act, directed to be taken by the court by an order made in reference

to a particular bankruptcy or that are directed to be taken by the court on an application by the

trustee or a creditor. Moreover, a bankrupt shall also as soon as practicable after adjudication

give the trustee a complete and accurate list of the property of the bankrupt and of the creditors

of the bankrupt and debtors of the bankrupt and update the lists as necessary. The bankrupt shall

also give the trustee any other information relating to the property of the bankrupt that the trustee

requires. In addition, he shall attend before the bankruptcy trustee when required by the trustee

and lastly he shall verify any statement by statutory declaration when required to do so by the

trustee.

It is also the duty of the bankrupt to provide the trustee with details of his income and

expenditure after adjudication when the trustee requires it. The bankrupt will also be required to

immediately notify the trustee of any change in the bankrupt’s address, employment and name.

10. Discharge of a bankrupt from bankruptcy

This is provided for extensively under section 253 of the 2012 and 2014 insolvency bills. Under

the section, a bankrupt is automatically discharged from bankruptcy three years after the bankrupt

lodged a statement of the bankrupt’s financial position in accordance with section 50 of the bill

which states that the bankrupt shall lodge a statement of financial position with the bankruptcy

trustee but may also apply to be discharged earlier before the expiry of the three year period.
There are however some exceptions from this general rule. A bankrupt is not discharged

automatically if the bankruptcy trustee or a creditor has objected and the objection has not been

withdrawn by the end of the three-year period, the bankrupt has to be publicly examined and has

not completed that examination and the bankrupt is not discharged from an earlier bankruptcy.

The automatic discharge has the same effect as if the court made an order for the bankrupt’s

discharge.

When making an order of discharge or at any earlier time, section 262 of the 2012 and the 2014

bills provides that the court may prohibit the bankrupt from doing after discharge a number of

things. These include inter alia, entering into, carrying on, or taking part in the management or

control of any business or class of business, being a director of a company or partner of a firm or

limited liability partnership, directly or indirectly being concerned or taking part in the

management of any company or limited liability partnership, being employed by a relative of the

bankrupt and being employed by a company, trust or other body that is managed or controlled by

a relative of the bankrupt. These limitations may be imposed for a certain period of time or

indefinitely.

Conclusion

The provisions of the 2014 insolvency bill are a replica of those contained in the 2012 insolvency

bill albeit with a few departures. The earlier bills, i.e. the 2008 bill and the 2010 bill are lighter as

regards the provisions they contain. The 2014 bill if enacted will therefore be the panacea of

Kenya’s insolvency law. The Kenyan Bankruptcy Act, Cap 53 Laws of Kenya is outdated and

does not contain some of the provisions of insolvency contained in the 2014 bill.

References:
The Bankruptcy Act, Cap 53 Laws of Kenya

The Insolvency Bills of 2008, 2010, 2012 and 2014