BANKRUPTCY TRUSTEES

RIARA LAW SCHOOL

 Who is a Bankruptcy Trustee?

• Section 3 of the Act defines the trustee as the person in charge of

the bankrupt’s estate.
• A declaration of bankruptcy, whether voluntary or forced, leads
to the debtor being divested of all of his property, which is then
vested in the trustee.
• Bankruptcy thus has the effect of transferring to the trustee all
rights that the bankrupt had over his property.
• The transfer of ownership arising from bankruptcy proceedings
obviously does not take place for the trustee’s personal benefit
but rather to enable the latter to wind up the bankrupt’s
property for the benefit of the creditors, in accordance with the
legislation and under the court’s control.
 Who is a Bankruptcy Trustee?

• The key function of the bankruptcy trustee is to realize and

distribute the bankrupt’s estate. The trustee is entitled to utilize
his discretion during the management of the estate.
• A bankrupt’s estate comprises all property belonging to or vested
in him at the commencement of the bankruptcy with the exception
of protected property.
• After acquired property of the bankrupt does not automatically
vest in the trustee for the benefit of the estate. However, the
trustee may claim for the bankrupt’s estate any property which
has been acquired or has devolved upon the bankrupt since the
commencement of the bankruptcy. To exercise this right the
trustee must give the bankrupt notice after obtaining knowledge
that the property has been acquired.
 Who is a Bankruptcy Trustee

• Section 104 of the Act provides that until the bankrupt is

discharged:
a)all property (whether in or outside Kenya) 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; and
b)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 bankruptcy trustee.
 Appointment of the Bankruptcy Trustee

• Section 59 of the Act identifies who has the power to

appoint a bankruptcy trustee:
i. The Creditor’s meeting
ii. The Official Receiver
iii.The Court
• Two or more persons may be appointed to act as joint
trustees.
• Note that the appointment of any person as a trustee only
takes effect when the person accepts the appointment.
• The document by which the person is appointed will state
the time at which the appointment will begin.
 Appointment by the Official Receiver
• If a creditor’s meeting is held, and the creditors fail to appoint a
trustee, the Official Receiver has the discretion to appoint a
suitable person to act as the trustee.
• If however, the official receiver fails to make the appointment
and gives due notice to the court, he will become the trustee in
respect of the bankrupt’s estate.
• Section 61 provides that the Official Receiver may at any time
while acting as the trustee appoint another suitably qualified
insolvency practitioner to act as the trustee instead. The court
must be given notice immediately this is done.
• Within 7 days of the appointment the new bankruptcy trustee
must give notice of his appointment to the creditors and in
accordance with the directions of the court advertise his
appointment.
 Appointment by the Court

• If a bankruptcy order is made when there is a

supervisor of a summary instalment order
approved in relation to the bankrupt the court
may appoint the supervisor of the order as
bankruptcy trustee in respect of the bankrupt’s
estate.
• In this situation there will be no need for the
Official Receiver to convene a meeting of the
bankrupt’s creditors.
 Appointment by the Creditors

• The Official Receiver may under section 52 of the Act convene the
first creditor’s meeting 30 days after receiving the bankrupt’s
statement of financial position.
• Alternatively, section 55 provides that if the Official Receiver fails
to convene a meeting of creditors any creditor of the bankrupt may
request that such a meeting be held. At least one quarter in value of
the creditors must agree to this meeting for the Official Receiver to
be forced to comply with the request.
• During this meeting the creditors are free to appoint a bankruptcy
trustee by a simple majority.
• Until such a time as a meeting is held to appoint a trustee there is no
trustee. During this period the official receiver is the manager of the
bankrupt’s estate.
 Powers of the Bankruptcy Trustee

• The powers of the bankruptcy trustee may be divided into two categories as
provided for under the first schedule to the Insolvency Act:
i. Those exercisable with the approval of the creditor’s committee
ii. General powers exercisable without the approval of the creditor’s
committee.
iii.Any person dealing with the trustee in good faith and for value is not
required to ascertain whether the authorization mentioned above has been
given.
iv.If the trustee has done anything without approval either the court, or the
creditor’s meeting may ratify the trustee’s actions.
v. Section 63(8) provides that a bankruptcy trustee may use his or her
discretion in administering a bankrupt’s property, but, in doing so, is
required to have regard to the resolutions passed by the creditors at
creditors’ meetings
 Powers of the Bankruptcy Trustee

• The Bankruptcy Trustee has the following ancillary powers

exercisable by virtue of section 14 of schedule I:
i. hold any kind of property;
ii. enter into contracts;
iii.sue and be sued;
iv.enter into engagements binding on that trustee and, in respect
of the bankrupt’s estate, on that trustee’s successors in office;
v. employ agents;
vi.execute powers of attorney, deeds and other documents; and,
vii.do any other acts necessary or desirable for the purposes of
the bankruptcy.
 General Powers of the Bankruptcy Trustee

• Power to sell any part of the property for the time being
comprised in the bankrupt’s estate
• Power to give receipts for any money received by bankruptcy
trustee, being receipts that effectually discharge the person
paying the money from all responsibility in respect of its
application.
• Power to prove, rank, claim and draw a dividend in respect of
such debts due to the bankrupt as are comprised in the
bankrupt’s estate.
• Power to deal with any property comprised in the bankrupt’s
estate to which the bankrupt is beneficially entitled as tenant in
the same manner as the bankrupt might have dealt with it.
 Powers Exercisable With Approval

• Power to carry on any business of the bankrupt so far as may be

necessary for winding it up beneficially
• Power to bring or defend legal proceedings relating to the property
comprised in the bankrupt’s estate
• Power to accept future consideration in return for sale of the
bankrupt’s property
• Power to borrow money for the beneficial realization of the
bankrupt’s estate and to give security for the borrowing
• Power to refer to arbitration, or to compromise any debts, claims
or liabilities subsisting between the bankrupt and any person who
may have incurred a liability to the bankrupt.
• Power to make such compromise or other arrangement as may be
considered beneficial with creditors in respect of the bankrupt’s
debts
 Challenging the Trustee’s decisions

• Section 71 of the Act provides that any person whose

interests are detrimentally affected may make an
application to the court to modify or reverse any
decision made by the trustee.
• The application must be made within 21 days after the
act or decision, and will only be allowed if the court is
satisfied that the trustee acted unreasonably or unfairly.
• In all other circumstances the court may confirm the
trustee’s decision with or without modifications.
• What happened in Bankruptcy Cause 28 of 1963?
 Before the first creditor’s meeting

• A bankruptcy trustee may sell property of the bankrupt before

the first meeting of creditors only if:
i. it is perishable or is likely to rapidly diminish in value;
ii. in that trustee’s opinion, its sale could be prejudiced by delay;
or
iii.expenses would, in that trustee’s opinion, be incurred by the
delay and, before sale, the bankruptcy trustee has consulted the
creditors.
iv.Section 66 requires the bankruptcy trustee to open and
maintain an account for the moneys realized from the
bankrupt’s estate. Additionally, the trustee is allowed to invest
such money if it is not immediately required to be paid in
relation to the administration of the estate.
 Duties of the Bankruptcy Trustee

• Section 72 provides that a bankruptcy trustee is expected to keep proper accounting

records. Interested persons such as creditors may be allowed to inspect these
records. These records must be kept for and can only be destroyed after three
years.
• The bankruptcy trustee is also required to prepare a final statement of receipts and
payments to and from the bankrupt’s estate after the final dividend has been paid
or if after realization the assets are insufficient to pay the debts. The final statement
should be available for inspection by interested parties and should be advertised
publicly as required.
• The bankruptcy trustee is also required to comply with the statutory audit which
the Official Receiver is allowed to conduct in order to assess the accounting records,
the statement of financial position, and the bank account maintained by the trustee.
• Note however that if the Official Reciever is the bankruptcy trustee the Auditor-
General may from time to time audit the records, statements and account referred
to above.
 Removal of the Bankruptcy Trustee

• A bankruptcy trustee can be removed from office only by:

i. an order of the Court; or
ii. a creditor’s meeting convened specially for that purpose
iii.A bankruptcy trustee who ceases to be a qualified insolvency practitioner must vacate
the office of trustee. The trustee may also vacate office if the bankruptcy order is
annulled, or after giving the court notice of a final meeting held in accordance with
section 253 of the Act.
iv.The death of the trustee will also create a vacancy in the office.
v. A bankruptcy trustee may also resign from his office by giving a notice of thirty days.
vi.Whenever there is a vacancy the Official Receiver holds office as bankruptcy trustee
until the vacancy is filled
vii.Section 76 provides that when the Official Receiver is acting as the bankruptcy trustee
he may be released by a court order, or when notice of the appointment of another
insolvency practitioner as trustee is given.
Control of the Bankruptcy Trustee by Creditors

• How do the creditors exercise control over the trustee?

• The creditors have a general control over the administration of the
bankrupt’s estate and its distribution.
• The creditors have the right to appoint a trustee, and also apply to the court
for the trustee’s removal.
• The creditors can also appoint a creditor’s committee and the First
Schedule to the Act sets out those powers which the trustee can only exercise
with the sanction of the creditor’s committee, if there is one, or if there is no
committee with the sanction of a general meeting of creditors.
• The creditor’s have the power to ratify any action taken by the trustee
without obtaining prior sanction. This will only happen where the creditors
are satisfied that the trustee acted in a case of urgency and sought
ratification without undue delay.
• It is also the creditor’s committee which fixes the remuneration of the
trustee. This may be a percentage of the value of assets realized.
Control of the Bankruptcy Trustee by the Court

• Any person who is dissatisfied with any act, omission to act or decision of a
bankruptcy trustee may apply to the court for an order to be issued under
section 79(2).
• On the hearing of such an application, the Court may:
i. confirm, reverse or modify the act, omission or decision concerned; or
ii. give the bankruptcy trustee directions; or
iii.make such other order as it considers appropriate
• Note that the bankruptcy trustee is free to apply for any directions to the
court whenever he needs assistance in dealing with a particular matter that
has arisen during the bankruptcy.
• In Re a Debtor (No 400 of 1940) it was held that the court would not, in the
absence of fraud interfere on the application of a bankrupt in the day to day
administration of the estate or hold the trustee liable for an error of
judgement made in good faith in respect of a matter within his discretion.
 Status of the Bankruptcy Trustee

• The Bankruptcy Trustee is a fiduciary officer. In particular, a

person who is a fiduciary generally owes two types of duties to
those with whom he or she is in professional contact. These are:
i. duty to use care and skill; and
ii. duty to act in good faith.
• The trustee is also an officer of the court. Trustees must not act
in the interests of one creditor or a group of creditors to the
detriment of the creditors as a whole. Nor must they act in the
interests of the debtor alone, thereby interfering with the rights
of the creditors. The trustee’s role is to assist the court and they
should do so with a spirit of neutrality and objectivity.
 The rule in Ex-parte James (1874)

• This principle was first enunciated in Re Condon, ex p James (1874). In this

case Bradshaw, a creditor commenced execution proceedings against a
debtor, Condon. The sheriff sold goods belonging to the debtor in execution
of the order. The debtor thereafter filed for bankruptcy. On the 10th of
January, 1874, Condon was adjudicated bankrupt, and Mr. J. E. James was
appointed trustee of his estate. Soon after the appointment of the trustee the
solicitors for the trustee threatened Bradshaw with proceedings if the
money received by him from the sheriff was not paid over to the trustee, and
Bradshaw, being advised that, according to the law as then laid down, he
would have no defence against such proceedings, paid the to the trustee.
Bradshaw later applied to the trustee for a refund and this was allowed. The
court held that the sherriff was within the law in giving the money to
Bradshaw, because at the material time it appeared that the debtor would
not be declared bankrupt.
 The rule in Ex-parte James (1874)

• A trustee must act justly. As officers of the Court and in exercising

powers and discretions and making decisions no lesser standard is to be
expected of them than of a court or judge. This principle is referred to
as the rule in Ex parte James.
• For the rule in Ex parte James to operate, it has been suggested that
four requirements must be met. These are:
i. that the bankrupt estate has been enriched by the relevant transaction
ii. that the claimant is unable to submit a proof of debt in the ordinary
way
iii.an honest person would consider it unfair for the trustee to retain the
money in question
iv.the rule only operates so as to nullify an enrichment of the bankrupt
estate.
 Liability of the Bankruptcy Trustee

• The Official Receiver, the Attorney General, a creditor of the bankrupt or

the bankrupt himself may make an application to the court for an order
under section 80 of the Act.
• If the Court is satisfied that the bankruptcy trustee has misapplied or
retained, or become accountable for money or other property comprising the
estate; the Court shall make either or both of the following orders:
i. order directing the bankruptcy trustee to repay, restore or account for the
relevant money or other property, together with appropriate interest
ii. an order directing the bankruptcy trustee to be disqualified from acting as
such
iii.These orders will also be made where the bankrupt’s estate has sustained a
loss as a result of misfeasance or a breach of fiduciary or other duty by the
bankruptcy trustee in performing that trustee’s functions
Creditor’s meetings

• Section 81 identifies two types of creditors meetings; the first creditors

meeting and subsequent creditors meetings.
• The meetings must be conducted according to the ordinary procedure for
conducting meetings under Company Law. i.e. notice must be given of
the meeting, a chairman must preside over the meeting, minutes have to
be taken, voting may be in person or by proxy and resolutions must be
passed in order for decisions to be deemed to have been taken. The
ordinary rules of adjournment also apply.
• Non-creditors can only attend the creditors meetings with the consent of
the bankruptcy trustee or the creditors themselves.
• A meeting of creditors is not valid unless attended by the bankruptcy
trustee, the creditors or their representatives as provided for under
section 92. (rules of quorum must be met)
 Creditor’s Committee

• Section 102 provides that a general meeting of the creditors of

a bankrupt may establish a creditors’ committee to perform
the functions conferred on it by Law. This power is only
exercisable where the bankruptcy trustee is a suitably qualified
insolvency practitioner other than the Official Receiver.
• This committee will be established by an ordinary resolution to
assist the bankruptcy trustee in the administration of the
bankrupt’s estate.
• The members of such a committee are entitled to receive
remuneration from the bankrupt’s estate in their capacity as
members of the committee only if it has been approved by an
order of the Court.