BANKRUPTCY LAW IN KENYA:NOTES PRT 1

*DISCLAIMER*

The notes below are adapted from the Kenyatta University, UoN and Moi University Teaching module and the students are adviced to take keen notice of the various legal and judicial reforms that might have been ocassioned since the module was adapted. the laws and statutes might also have changed or been repealed and the students are to be wary and consult the various statutes reffered to herein

Definition

Bankruptcy: The unpleasant condition of being bankrupt, which can be brought upon a debtor by a legal petition either from himself of from an unpaid creditor.

Bankruptcy: a person is insolvent if he is unable to pay his debts as they fall due. A creditor may ‘sue for bankruptcy’ in order that a court may declare the person legally bankrupt which will affect his ability to undertake commercial transactions.

Bankruptcy: When a firm or individual goes bust. That simple definition becomes complicated in practice: at what point should bankruptcy be declared, how are creditors paid off, can a bankrupt company continue operating, how long should an individual bankrupt be penalized for his past? The British answer to these questions has traditionally been more extreme than the American or continental European approach.

In the United States, companies can file for “Chapter 11 bankruptcy”: by presenting the court with an acceptable plan for recovery, they can be protected from their creditors for a specified period. Japan has bankruptcy laws modeled on America’s, although close relations between firms, banks and shareholders mean  that big collapses are rare. In Britain, a firm or its creditors can apply for a bankruptcy order. If granted, the company’s assets come under the control of an official receiver, who appoints a liquidator to sell them and distribute the proceeds.

Bankruptcy: Where a person becomes bankrupt, a trustee in bankruptcy may be appointed and given statutory power to sue for debts due to the bankrupt party. Certain rights of action will not pass to the trustee, however. Thus he may not sue in respect of personal services to be rendered by the bankrupt, nor may the trustee sue in respect of rights  of actions which the bankrupt may have in defamation. The trustee may also disclaim onerous contracts which the bankrupt hay have made, thus discharging the debtor form his obligations.

Insolvency: a state in which a business or person is unable to pay debts as they fall due. Experience in dealing with insolvency and bankruptcy was fundamental to the mergence of the accountancy profession in the UK in the second half of the 19^th century.

Insolvency: Strictly, the condition of a company whose liabilities (what it owes) exceed its assets (what it owns and what it is owed). Not all insolvent companies end up in the corporate graveyard. Understanding creditors may help them to work themselves out of insolvency. More often than not, insolvent companies are ”wound up” with their creditors getting whatever they can from the forced sale of the company’s assets.

The bankruptcy proceedings in Kenya are governed by the Kenya Bankruptcy Act (Cap 53). This act is based on the English Bankruptcy Act 1914

According to Blackstone: “Bankruptcy is a proceeding by which, when a debtor cannot pay his debts or discharge his liabilities or the persons to whom he owes money or has incurred liabilities cannot obtain satisfaction of their claims, the courts in certain circumstances take possession of his property by an officer appointed for the purpose, and such property realized and distributed in equal proportions among the persons to whom the debtor owes money or has incurred pecuniary liabilities”. In simple words, a person is insolvent or bankrupt who cannot pay his debts or discharge his liabilities on the due date. The creditors or the debtor himself may present a petition to the court that a receiving order should be made.

English law

In English law until 1861 only traders could be made bankrupt, but the Bankruptcy Act 1861 made all debtors subject to bankruptcy proceedings. Married women could be adjudicated bankrupt only when trading, whether separately from their husband or not. But the Law Reform (Married Women and Tortfeasors) Act made married subject to bankruptcy proceedings as if she were a feme sole.

Object of bankruptcy

The object of bankrupt is twofold:

1.      protection of honest debtors; and

2.     safeguarding the interests of creditors by means of equitable distribution of the assets of an insolvent debtor among his creditors.

When a person is adjudicated bankrupt, all his assets are taken over by an officer of the court an distributed in equal proportions among his creditors. After the distribution is complete, the unpaid debts are cancelled and the bankrupt is allowed to engage in trade or service without any of his previous obligations. The creditors lose a part of their claims and the debtor is free to make a new start in life.

Who can be made bankrupt

In general any person capable of entering into a contract may be made bankrupt except:

1.      Minors or infants. It is only if an infant has incurred debts which are legally enforceable against him such as for the purchase of necessaries that he can be declared bankrupt.

2.     Lunatics. A person of unsound mind may be made bankrupt if the act of bankruptcy was committed during a lucid interval.

3.     Partners. A creditor may present a petition of bankruptcy against any one partner or he may present a joint petition against two or more of them.

4.     Corporations. No bankruptcy petition can be presented against any corporation or association or company registered under any enactment. Thus a company registered under the Companies Act cannot be made insolvent; it must be wound up under the Act.

Historical evolution of bankruptcy law

Texts:

Bankruptcy Act, Cap 53

Macneil I: Bankruptcy in East Africa

Fridman: Bankruptcy law and practice

Thomson: The principles of bankruptcy law

Holdsworth:  Historical development: Bankruptcy

Basically the law of bankruptcy has a long history and only a summary of the main developments may be highlighted.

1.      In the English medieval and mercantilist periods the law commences with a statute enacted during the reign of King Henry VIII which largely dealt with fraudulent traders. This legislation was passed in 1542 and it aimed mainly at securing the property of a debtor for his creditors. It did nothing to relieve the debtor of his obligations if his debt exceeded the value of his property. If this occurred, the debtor remained liable for the debt and could even be imprisoned for failure to repay. It should be noted that the law was introduced  specifically to protect creditors. However, each creditor proceeded against the debtor individually and the debtor’s property was acquired on the principle of first come first served.

2.     Early bankruptcy law only applied to traders. It should be recalled that this was the mercantilist feed trade era of the 16^th and 17^th centuries. The traders complained about the unfairness of the law but their outcry for protection led only to piecemeal reform and amendments but the punishment of the debtor was not allievated in any way. None traders who could not pay their debts was subject to another set of statutes relating to insolvent debtors. In the 18^th and 19^th centuries there was great expansion in the availability of credit. This was the era of the formation of joint stock companies which preceded the modern limited liability companies. Debtors were therefore on the increase. This is as a result of the historical development of capitalism as a mode of production where competition is emphasized culminated in monopoly capitalism. Hence those who cannot compete within the system fall out and many become debtors. However, it was discovered that people do not become debtors of their free will. A distinction is sought to be made between a dishonest debtor who should be punished and honest but unfortunate ones who should be protected . In 1834 the Bankruptcy law was extended to non-traders. Some land owners had become debtors and had to be catered for by the law. In 1869 an act to amend and consolidate the existing law was passed. This act contained many of the substantive bankruptcy law principles which are now in operation today. The broad principle of the act was that the bankrupt should be a freed person. He should be freed not only from his debt but also from  his every possible claim or liability except for person torts committed by him. On the other hand,  all creditors were group together for purposes of proceeding against the debtor. The act also provided for the administration of law and manners in the London bankruptcy district by judges of the high court specially appointed by the Lord Chancellor and in the counties by county court judges. There was no separation between the judicial and administrative functions, both of which were exercised by the court. The administration of bankruptcy matters under the 1869 Act  did not work well due to the lack of official control over the trustees in bankruptcy which was a new office created by the Act in place of the former system of official assignee. In 1883 another Act was passed which repealed the 1869 Act and amended and consolidated the law. This is the act that laid made the basis of modern bankruptcy administration. It separated the judicial and administrative functions. The judicial functions remained vested in the high court and county courts while the administrative functions were transferred to a board of trade. The 1883 Act also introduced the present day law on the following:

1.      the public investigation by the court into the debtors conduct

2.     punishment for bankruptcy offence committed by the bankrupt

3.     strict investigation and proof of debt

4.     general supervision of proceedings including the control of funds and independent auditors of trustees accounts. No important reforms were introduced by the Bankrupt Act of 1890 and the  Bankruptcy and Deeds of Arrangement Act of 1913. The main reform made by the 1890 Act  was in respect of the conditions for the discharge of a bankrupt. The 1913 Act made offences by a bankruptcy punishable summarily and tightened the law as to their criminal liability. The present law of bankrupt of England is contained in the following:

1.      The bankruptcy Act o 1940 which was a consolidating act of legislation

2.     The bankruptcy rules of 1915

3.     the bankruptcy amendment Act of 1926

4.     the judicial decisions on the construction of these statutes.  However it is important to note that there have been subsequent developments in England culminating in the enactment of the 1986 Insolvency Act. In Kenya bankruptcy is governed by the Bankruptcy Act 1938, Cap 53 of the Laws of Kenya. This act is largely identical to the English Bankruptcy act of 1914 and the Bankruptcy Amendment Act of 1926.

Two, the bankruptcy rules are similar to English bankruptcy rules of 1952 which do not differ significantly from then English bankruptcy rules of 1915

Three, legislation. Dealing with deals of arrangements is against patterned on the English act of 1914 and this is the deeds of arrangement act of 1930 which is the current cap 54 of the laws of Kenya.

Bankruptcy and insolvency

Bankruptcy is the legal status of an individual against whom an a adjudication order has been made by the court primarily because of his inability to meet his financial liabilities and an adjudication order in bankruptcy is a judicial declaration that the debtor is insolvent and has the effect of imposing certain disabilities upon him and of divesting him of his property for the benefit of his creditors. Bankruptcy must be distinguished from insolvency which may be defined as the inability of a debtor to pay his debts as and when they fall due. 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,.

Objects of the bankruptcy laws

Three main objects of bankruptcy laws within the common law jurisdiction have been identified as follows:

1.      to secure an equitable distribution of the property of the debtor among his creditors according to their respective rights against him

2.     to relieve the debtor of his liability to his creditors and to enable him to make a fresh start in life freed from the burden of his debts and obligations

3.     to protect the interests of the creditors and the public by providing for the investigation of the conduct of the debtor in his affairs and for the imposition of punishment where there has been fraud or other misconduct on his part. Prof. Fridman in his book Bankruptcy Law and Practice has given some reasons for the growth of bankruptcy. He says that the alleviating of the plight of the debtor by a more merciful though rigourous provision of bankruptcy law has several causes:

1.      the rise in importance of trading on credit and the need to encourage such trading for commercial purposes thus increasing chances for financial embarrassment for traders which would make trade more difficult if the harshness of the older law of debt still remained in force

2.     the change in outlook of society towards those who failed to pay their debts from regarding them as criminals to looking them only as unfortunate

3.     the need to protect creditors by giving them some relief though not as great as they are justly entitled to expect  rather than punishing the debtor.

4.     the benefit to the community as a whole in that (a) the creditors should get something  rather than lose all if the debtor could escape with the assets he has or is imprisoned so as to be unable to obtain any assets in the future and (b) an opportunity is afford to the debtor to make a fresh start. Prof. Fridman does assert that the modern law of bankruptcy is a compromise which is intended to benefit all the parties

Basic principles of this law:

1.      the debtor must surrender all his property to the creditors

2.     after payment of a percentage of his liabilities the debtor may obtain a full discharge from his past debt

3.     the creditors may grant a debtor a discharge even when the debtor pays them less that what is prescribed by the law

4.     the court is the arbitrator in all matters relating to the bankruptcy

5.     while discharged a debtor is freed from his financial obligations and reverts to his former status in society

PROCEEDINGS IN BANKRUPTCY

A summary

The proceedings in bankruptcy are begun by the presentation to the court of a Bankruptcy Petition.  This petition asks the court for a Receiving Order to be made in respect of a debtor’s property.  The petition may be presented either by the Debtor himself or by a Creditor.  If it is presented by a creditor the petition must be founded or based on an alleged Act of Bankruptcy which has occurred within 3 months before the presentation of the petition.  Indeed the acts of Bankruptcy are in effect statutory tests of insolvency.

If it is the debtor himself who presents the petition that in itself constitutes an act of bankruptcy.  Upon hearing the petition the court may dismiss it, if it has no merit or make a receiving order if it is found to be with merit.  This order does not make the debtor bankrupt all it does is to place his property in safe custody pending the outcome of the proceedings.

The first meeting of creditors is then held at which it is determined whether a composition or scheme of arrangement if one is submitted by the debtor  shall be accepted or whether application shall be made to the court to adjudicate the debtor bankruptcy.  If the court decides to adjudicate the debtor bankrupt it makes an Adjudication Order and the debtor will then become bankrupt.  The debtors property will then vest in his trustee in bankruptcy who will collect in the property and distribute it among those creditors who have proved their debts.

The bankrupt must also submit himself to a Judicial Public Examination and at any time after conclusion of this public examination the bankrupt can apply for his Discharge.

If the court makes an order of discharge the bankrupt is released from all his debts with certain exceptions provable in bankruptcy and is freed from disabilities against some exceptions which were imposed upon him by the bankruptcy.

WHO IS A CREDITOR & WHO IS A DEBTOR

A creditor is any person who is entitled to enforce payment of a debt at law or equity.  The Bankruptcy Act (BA) Section 3(2) defines who a debtor is.  It states that a debtor includes any person whether domiciled in Kenya or not who at the time when any act of Bankruptcy was done or suffered by him

(a)              Was personally present in Kenya; or

(b)              Ordinarily resided or had a place of residence in Kenya; or

(c)               Was carrying on business in Kenya personally or by means of an agent or manager or

(d)              Was a member of a firm or partnership which carried on business in Kenya and includes a person against whom bankruptcy proceedings have been instituted in a reciprocating territory and who has property in Kenya

WHO MAY BE ADJUDGED BANKRUPT

1.          In relation to Infants

Generally apart from contracts for necessaries infants are not liable in respect of debts that they have incurred.

Re Davenport [1913] 2 All E.R. 850

Re A Debtor [1950] Ch. 282

But if an infant fraudulently contracts a debt during his infancy he will be held liable for the debt and the creditor may claim in bankruptcy on his acquiring the age of majority.  This is as per the Infants Relief Act of England 1874 which is a statute of general application to Kenya.

2.         Insane Persons

These are also subject to bankruptcy proceedings.  Generally persons of unsound mind cannot be adjudicated bankrupt without the court’s consent.  Refer to the Bankruptcy Rule 247.

3.         Married Women

Section 117 of the BA provides that every married woman shall be subject to the law relating to bankruptcy as if she were ‘feme sole’.

4.         Aliens & Persons Domiciled Abroad

They are also subject to bankruptcy proceedings if Section 6(1) (d) of the B A within a year before the date of 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.

5.         Companies/Corporations

Here bankruptcy proceedings are not applicable to companies.  These are dealt with under liquidation and winding up provisions of the Companies Act Cap 486.  Section 118 of the BA provides that a “Receiving Order shall not be made against any corporation or against any association or company  registered under the Companies Act or any enactment repealed by that Act.” The position in England has been reformed by the Insolvency Act.

6.         Partnerships

Whether the partnership is general or limited, it is subject to the provisions of the Bankruptcy Act.  Section 119 thereof states as follows “subject to such modifications as may be made by rules under Section 122 this Act shall apply to limited partnerships in the same manner as if limited partnerships were ordinary partnerships and on all the general partners of a limited partnership.  Being adjudged bankrupt the assets of the limited partnership shall vest in the Trustee in Bankruptcy.

7.         Deceased Persons

There is a provision for administration in bankruptcy of the estate of a deceased person under Section 121 (1) of the BA.  Section 107 BA also enables proceedings already commenced to continue as if the debtor were alive.  Where the debtor is dead a petition may be presented by his personal representative when its purpose is to obtain an administration order.

8.         Judgment Debtor

The BA does not prevent an undischarged bankrupt from creating valid debts and since he may commit an act of bankruptcy, institution of subsequent bankruptcy proceedings before he is discharged from a prior bankruptcy is permissible.

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 or 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 delivering 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.

3. Fraudulent Conveyance:

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

•   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;

•  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 creditor 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.

•           Where a debtor transfer’s 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.

•        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.

4.  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.

5.  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 (1950 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;

2. 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

3. 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.

6.  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. 

7. EXECUTION AGAINST GOODS.

If a 3^rd 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.

8.  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.

9.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 but 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 depth.

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.

10.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 about to receive 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.

PROCEDURE OF ADJUDICATION

1.          The Petition:

As noted earlier bankruptcy proceedings are begun by the presentation of a petition by the debtor himself or by a creditor against the debtor.  This is in accordance with the provisions of Section 5 of the BA.

Petition of Debtor against himself:

Under Section 8(1) of the BA and BR 105 a debtor may present his own petition the filing of which is deemed to be an act of bankruptcy.  The petition must state that the debtor is unable to pay his debt and must request that a receiving order or an adjudication order be made. A receiving order is made at once without any hearing in accordance with BR 125.  An adjudication order may also be made at once.  The debtor must file with the official receiver a statement of affairs prepared in accordance with the provisions of Section 16 of the BA.  The petition must further comply with the provisions of BR 106 to 108.   A debtor’s petition shall not after presentation be withdrawn without leave of the court.

Creditor’s Petition

Again here as noted any person entitled to enforce payment of a debt at law or equity may be a petitioning creditor.  A creditor may petition if the following conditions are satisfied:

1.                   Pursuant to Section 106 BA and BR 110

(a)                          The amount owed is not less than 50 pounds or Kshs. 1000 as fixed under the English Bankruptcy Act of 1914;

(b)                          The debt is a liquidated sum payable either immediately or at some certain future time;

(c)                           The act of bankruptcy on which the petition is grounded has occurred within 3 months before the presentation of the petition;

(d)                          The debtor is domiciled in Kenya or within a year before the date of the presentation or the petition has ordinarily resided or other dwelling house or a place of business in Kenya 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. 

The debt due to the petitioning creditor must have existed as a liquidated sum i.e. a fixed sum or one capable of being computed with certainty at the date of the act of bankruptcy.  It is not sufficient that the debt should have become liquidated at the date of presentation of the petition if it had in fact been un-liquidated at the earlier debt.  Refer to Re Debtors [1927] 1. Ch. 19 and Mohammed V. Lobo [1953] EACA 117.

2.                              The Hearing of the Petition:

Under BR 125 where a petition is filed by a debtor the court shall forthwith make a receiving order thereof. The hearing of a creditor’s petition takes place after the expiration of 8 days from the date of service thereof on the debtor.  But a hearing within the 8 days may be ordered.  Where the debtor has filed a declaration of inability to pay his debts or where the debtor has absconded or for any good cause shown.

Under BR 128 if the debtor wishes to oppose the petition he must file a notice with the registrar of the court specifying the statements in the petition which he denies.  Further he must also send a copy of the notice to the petitioning creditor 3 days prior to the date of the hearing.  

At the hearing set by the registrar under BR 126 the petitioning creditor must prove the debt.  He must also prove service of the petition on the debtor and he must also prove the act of bankruptcy being relied on.  Thereupon the court may make a receiving order as per section 5 BA for the protection of the Estate.  If the court is not satisfied with prove of any of these matters or is satisfied by the debtor that he is able to pay his debt or that for other sufficient cause no order ought to be made it may dismiss the petition under Section 7 (3) of the BA.

If the Act of bankruptcy which is being relied upon is non-compliance with a bankruptcy notice the court may if it thinks fit stay or dismiss the petition if an appeal is pending from the judgment or order.  Section 7(4) as read with 7(5) BA.

The court may also stay all proceedings on the petition if the debtor denies indebtness to the petitioner or the amount of the debt until that has been determined.  Where proceedings are stayed the court may if by reason of the delay caused by the stay of proceedings or for any other cause it thinks just make a receiving order on the petition of some other creditor and shall thereupon dismiss on such terms as it thinks fit the petition in which proceedings have been stayed.

A creditor cannot rely upon an act of bankruptcy committed before his debt came into existence but the debt need not have been due to the petitioning creditor at the date of the act of bankruptcy.  A petition once presented cannot be withdrawn without leave of the court.

3.                  Appointment of Interim Receiver:

Under BA Section 10 at any time after the presentation of the petition and before a receiving order is made the court may if it is shown to be necessary for the protection of the estate appoint the official receiver to be interim receiver of the property.  The official receiver may himself appoint a special manager to conduct the business of the debtor.  The court may also stay any action execution or other legal process against the property or person of the debtor.  Refer to BR 119 TO 124.

4.         The Receiving Order:

Section 9 of the BA as read with BR 138 to 148.  If the court does not dismiss or stay the petition, it will make a receiving order.  Upon the making of the receiving order the official receiver becomes receiver of the debtor’s property.  Thereafter no legal proceedings may be brought or the debt provable in the bankruptcy except by leave of the court.  Once the official receiver steps in no proceedings can be brought against the debtor except with the leave of the court.  This however does not prejudice a secured creditor’s rights to deal with his security according Section 9(2) as read with Section 6(2) BA.

The receiving order does not make the debtor bankrupt nor does it deprive him of the ownership of his property.  It is only the possession and control of his property that are taken away from him.  Thus any transactions subsequently entered into by the debtor are prima facie invalid whether or not the other party to the transaction has notice of the receiving order.

The notice of the receiving order stating the name address and description of the debtor, the date of the order, the courts by which the order was made and the date of the petition must be published in the Kenya Gazette and one of the local daily papers.  Section 13 of the BA as read BR 145.  The production of a copy of the Gazette containing any notice of the receiving order is conclusive evidence that the order was duly made on the stated date.  Even after the making of the receiving order the debtor may apply for its rescission in accordance with BR 147 to 148.

5          Debtor’s Statement of Affairs:

Upon the making of a receiving order the debtor must attend a private interview to determine how the Estate should be administered and to receive instructions as to the preparation of his statement of affairs.  The debtor must submit his statement of affairs to the official receiver within 3 days of the receiving order if the order is made on the debtor’s own petition or within 14 days or if the order is made on the creditor’s petition.  It may be extended by the court or official receiver on application of the debtor.  BA 16(1) BR 149 to 150.  The statement of affairs must be in the prescribed form verified by Affidavit and must show the following:

(a)              The particulars assets, debts and liabilities;

(b)              The names, residencies and occupations of these creditors;

(c)               The securities if any held by them respectively and the dates when they were given and

(d)              Such further or other information as may be prescribed or as the official receiver may require. 

Under Section 16(3) BA if the debtor fails without reasonable excuse to comply with these requirements, the court may on the application of the official receiver or of any creditor adjudge him bankrupt. 

Any person stating himself in writing to be a creditor of the bankrupt may personally or by agent inspect the statements of affairs at all reasonable times and take a copy thereof.  But if any person untruthfully states that he is a creditor, then he shall be guilty of contempt of court and be punished accordingly on the application of the trustee in bankruptcy or the official receiver.

The First Meeting of Creditors 

It is provided under section 14 and 15 of the BA as read with the first schedule to the BA. As soon as may be after the making of the receiving order against a debtor a general meeting of his creditors referred to as the first meeting shall be held for the purpose of considering whether a proposal for a composition  or scheme of arrangement shall be accepted or whether it is expedient that the debtor shall be adjudged bankrupt and generally as to the mode of dealing with a debtor’s property with respect to the summoning of and proceedings at the first and other meetings of creditors the rules in the first schedule to the BA apply.

The official receiver must summon the first meeting of creditors not latter than 60 days after the date of the receiving order. He must give not less than 6 clear days notice of the time and place in the Kenya Gazette and in a local daily paper. Furthermore he must send a note to each creditor mentioned in the statement of affairs. Together with this notice he must also send a summary of the statement of affairs with comments  which he may wish to make as well as a form of proxy if a composition or scheme of arrangement is to be considered at the meeting he must send a copy of the scheme and his remarks thereof. Notice must also be sent to the debtor to attend the meeting.

The official receiver or his nominee shares the meeting. All creditors may attend but a creditor  who has not previously lodged approval of his debt may not vote at the meeting. The purpose of the meeting is to decide whether the debtor should be adjudged bankrupt or whether any composition or scheme which he may have submitted should be accepted and in the former case the creditors may appoint a trustee and a committee of inspection.

Composition or scheme of arrangement

This is provided for under section 18 BA and BR 160-169. A composition is an arrangement between   two or more persons for the payment of one to the others of a sum of money in satisfaction of an obligation to pay another sum differing either in amount or mode of payment.

A scheme of arrangement is a proposal of dealing with his debts by an insolvent debtor by applying his assets or income in proportionate payment of them which proposal if agreed by his creditors or the requisite majority of them. Therefore the scheme or composition is on the debtor’s initiative. If the debtor wishes to make a proposal for a composition or for a scheme of arrangement of his affairs the provisions of section 18 BA come into operation:

1.          He must lodge his proposal with an official receiver within 4 days of submitting his statement of affairs or within such further time as the official receiver may allow. The proposal must be in writing and signed by the debtor.

2.         The official receiver must summon a meeting of creditors before the public examination of the debtor is concluded and send to its creditors before the meeting a copy of the debtor’s proposal with his report attached thereto.

3.         The proposal must be approved by a majority in number and three-quarters in value of all the creditors who have proved their debts. Creditors may vote by letter in the subscribed form to the official receiver so as to be received by him not later than the day preceding the meeting. Creditors who do not vote are regarded as voting against the resolution.

4.        The debtor may at the meeting amend the terms of his proposal if the amendment is in the opinion of the official receiver calculated to benefit the general body of creditors.

5.         After the proposal is accepted by the creditors it must be approved by the court. Either the debtor or the official receiver may apply to the court to approve it and three days notice of the time appoint for hearing the application must be given to each creditor who has proved his debts.

6.        The application cannot be heard until after the conclusion of the public examination of the debtor. Before approving the proposal the court must here the report of the official receiver as to its terms and as to the conduct of the debtor and any objections which may be made by or on behalf of any creditor. A creditor may oppose the application not withstanding that he voted for its acceptance at the meeting of creditors.

7.         The court must refuse to approve the proposal if in its opinion the terms of the proposal are unreasonable or not for the benefit of the general body of creditors.

8.        In any other case, the court may either approve or refuse to approve the propose.

9.        Once a composition or scheme is approved by the court it is binding on all creditors whose debt are proved with the exception unless the creditor accepts the proposal of those debts from which the debtor will not be released by an order of discharge.

10.     If the scheme is approved the receiving order is rescinded and subject to payment of the official receiver’s costs, the debt or the trustee under the scheme is put in possession of the property.

11.       The scheme may be annulled in the following cases:

(i)                            if default is made in payments of any installments due under the scheme; or

(ii)                          if it appears to the court that the scheme cannot in consequence of legal difficulties or for any sufficient cause proceed without injustice or undue delay to the creditors or the debtor; or

(iii)                        if the consent of the court was obtained by fraud.

If the scheme is annulled the court may adjudge the debtor bankrupt but any dispositions or payments made under the scheme remain valid.

The creditors may also accept a proposal for a composition or scheme at any time after adjudication. The procedure is the same as in the case of a composition or scheme accepted before adjudication and upon approving the scheme the court may annul the adjudication order. Where the adjudication is annulled any assets remaining after payments to the creditors of the amount owed them under the scheme in respect of which no order has been made reverts in the debtor.

Public Examination of the Debtor

Section 17 BA as read with BR 151-159. Here where a receiving order has been made the official receiver applies to the court for the appointment of a time and place for the public examination of the debtor. The examination must be held as soon as is convenient after the expiration of the time for the submission of the debtor’s statement of affairs. The court may adjourn it from time to time.

The official receiver must notify the debtor and creditors of the time and place of the examination and must advertise the order in the Kenya Gazette and in a local daily papers. The public examination may be dispensed with under the provisions of section 17n(11) BA. If the debtor fails without sufficient cause to attend the examination the court may issue a warrant for his arrest. In this case and also if the debtor fails to disclose his affairs or comply with an order of court in relation to his affairs the court may adjourn the examination sine die. It may then adjudge the debtor bankrupt forthwith and he will be unable to obtain discharge until he can obtain an order of the court for the examination to be continued. Any creditor who has lodged proof of his debt or his representative authorized in writing may put questions to the debtor concerning his affairs and causes of his failure.

The official receiver or trustee if one has been appoint and the court take part in the examination and put questions to the debtor. The debtor’s advocate may also attend the examination but not ask any questions or address the court. The debtor is examined on oath and must answer all questions which the court may put or allow to be put to him. Notes of the examination are taken down in writing and after being read over to or by the debtor and signed by him may be used in evidence against him in other proceedings. These notes are open to the examination of creditors at all reasonable times.

When the court is of the opinion that the affairs of the debtor have been sufficiently investigated it makes an order declaring that the examination is concluded but the order cannot be made until after the day appointed for the first meeting of creditors.

The power to arrest the debtor

Under section 26 BA the court may order the arrest of the debtor and the seizure of any books, papers or goods in his possession in the following circumstances:

1.          If after a bankruptcy notice has been issued or after a petition has been presented by or against him, there is a probably reason for believing that he has absconded or is about to abscond without a view to avoiding payment of the debt in respect of which the bankruptcy notice was issued or avoiding service of a bankruptcy petition or attending an examination or otherwise delaying or embarrassing the proceedings against him

2.         The debtor may also be arrested if after presentation of a petition by or against him there is cause to believe that he is about to remove his goods with a view of prevent or delaying possession being taken of them by the official receiver or trustee or that there is ground for believing that he has concealed or he is about to conceal or destroy any of his goods or any books, documents or writings which might be of use to his creditors

3.         If after service of a petition or the making of a receiving order he removes any goods in his possession above the value of five pounds without the leave of the official receiver or trustee

4.        if without good cause shown he fails to attend any examination ordered by the court.

It should be noted that no arrest is valid upon a bankruptcy notice unless the notice is servable upon the debt before or at the time of his arrest.

 

THE ADJUDICATION ORDER

Reference may be made to the BA Section 20 and BR 180 – 185.

The grounds for Making an Adjudication Order

When a receiving order has been made the official receiver or any creditor may apply to the court to adjudge the debtor bankrupt.  The court may adjudge the debtor bankrupt in the following cases:

1.                   If the creditors at their first meeting or at any adjournment thereof so resolve by ordinary resolution;

2.                  If they pass no resolution;

3.                  If they do not meet at all;

4.                  If a composition or scheme is not approved within 14 days after the conclusion the public examination of the debtor or such further time as the court may allow;’

5.                  If the debtor applies to be made Bankrupt;

6.                  If a quorum of creditors has not attended the first meeting of creditors or one adjournment thereof;

7.                  If the court is satisfied that the debtor has absconded or does not intend to propose a composition or scheme;

8.                  If the public examination is adjourned sine die;

9.                  If the debtor without reasonable cause fails to submit his statement of affairs;

10.               If a composition of scheme is annulled by the court.

Upon the making of an adjudication order, notice thereof must be gazetted and advertised in a local paper.

Annulment of the Adjudication Order:

The adjudication order may be annulled in the following cases:

1.                   If in the opinion of the court the debtor ought not to have been adjudged bankrupt;

2.                  If his debts are paid in full;

3.                  If a composition or scheme is accepted by the creditors and approved by the court;

The court has a discretion as to annulling the adjudication order and may do so where the bankrupt has committed bankruptcy offences even if the debts are paid in full.  Here a voluntarily lease by a creditor is not equivalent to payment in full by the debtor.

Under Section 33(b) any debts disputed by the debtor is considered as paid in full if he enters into a bond in such sum and with such sureties as the court approves to pay the amount to be recovered in any proceedings for its recovery with costs.  Also any debts due to a creditor who cannot be found or cannot be identified is considered as paid in full if paid into court.  it should be noted that the annulment of an adjudication does not affect the validity of any sales or dispositions of property or other acts properly done by the official receiver, trustee or any person acting under their authority or by the court.

The annulment of an adjudication order releases the debtor from the personal disabilities imposed upon him by the bankruptcy but does not prevent criminal proceedings from being brought against him for Bankruptcy offences.

DISABILITIES OF A BANKRUPT

Upon adjudication the bankrupt becomes subject to the following disabilities:

1.                   All property belonging to him including property acquired by him prior to his discharge vests in the trustee in Bankruptcy for distribution among his creditors;

2.                  He must not either alone or jointly with any other person obtain credit to the extent of 10 pounds or upwards from any person without informing that person that he is an undischarged bankrupt;  Section 139 (a) BA;

3.                  He must not engage in any trade or business under a name other than that under which he was adjudicated bankrupt without disclosing to all persons with whom he enters into any business transactions the name under which he was adjudicated  Section 139 (b) of the BA;

4.                  Under Section 188 of the Companies Act he cannot act as a director or a company or directly or indirectly take part in the management of a company except by leave of the court by which he was adjudged bankrupt;

5.                  He cannot act as a receiver or manager of the property of a company on behalf of the debenture holders except under appointment made by order of the court;

6.                  Under Section 35 (1) (d) of the current Constitution a bankrupt is disqualified from being a member of parliament or a member of a local authority if elected he will have to relinquish his seat;

7.                  He cannot act as an advocate under Section 32 of the Advocates Act Cap 16 of the Laws of Kenya.

DISCHARGE OF A BANKRUPT

Application for Discharge:

The Bankrupt can apply for his discharge at any time after adjudication but the application cannot be heard until after the public examination is concluded  Section 129 and BR 186 to 197.

The registrar of the court must give 28 days notice of the time and place of the Hearing to the official receiver and the Trustee.  The official receiver must forthwith send notice thereof for gazetting and must give 14 days notice or the Hearing to every creditor.  At the hearing or the application which is held in open court the official receiver submits a report as to the bankrupt’s conduct during the proceedings of his bankruptcy.  A copy of this report must be forwarded to the bankrupt not less than 7 days before the hearing and if the bankrupt wishes to dispute any statement therein, he must notify the official receiver of this fact not less than 2 days before the hearing.

A creditor who wishes to oppose the discharge on any ground other than those mentioned in the official receiver’s report must not less than two days before the hearing file in the court a written notice of his intended opposition stating the grounds thereof and serve a copy on the official receiver and the bankrupt.

Courses Available to the Court:

At the Hearing the court may do any of the following things:

1.                   Grant an absolute and immediate discharge;

2.                  Refuse the discharge;

3.                  Grant an order of discharge subject to conditions with respect to any earnings or income which may afterwards become due to the bankrupt or with respect to his after-acquired property;

The court will normally only grant an unconditional absolute discharge where the bankrupt is entitled to a certificate of misfortune i.e. a certificate of the court to the effect that the bankruptcy was brought about by causes beyond the debtor’s control without any misconduct on his part.  This has the effect of releasing the debtor from those statutory disqualifications which will otherwise attach to him after discharge.  There are no cases in which the court is bound to refuse a discharge but it cannot grant an immediate and conditional discharge.  Where the bankrupt has been convicted of any offence connected with his bankruptcy or where any of the following facts have been proved against him:

These facts as contained in Section 30 BA

(a)              That his assets are not of a value equal to 10 shillings in the pound on the amount of his unsecured liabilities unless this is due to circumstances for which he cannot justly be held responsible;

(b)              That he has omitted to keep such books of accounts as are usual and proper in the business carried on by him within 3 years immediately preceding his bankruptcy;

(c)               That he has continued to trade after knowing himself to be insolvent;

(d)              That he has contracted any debt provable in the bankruptcy without having at the time of contracting any reasonable or probable expectation of being able to pay it;

(e)              That he has failed to account satisfactorily for any loss of assets or for any deficiency of assets to meet his liabilities;

(f)                That he has brought on or contributed to his bankruptcy by rash and hazardous speculations or by unjustifiable extravagance in living or by gambling or by neglect of his business affairs;

(g)              That he has put any of his creditors to unnecessary expense by frivolous or vexatious defence to any action properly brought against him;

(h)              That he has brought on or contributed to his bankruptcy by incurring unjustifiable expense in bringing a frivolous or vexatious action;

(i)                That he has within 3 months preceding the date of the receiving order when unable to pay his debts as they became due given undue preference to any of his creditors;

(j)                That he has within 3 months preceding the date of the receiving order incurred liabilities  with a view to making his assets equal to 10 shillings in the pound on the amount of his unsecured liabilities;

(k)              That he has on any previous occasion been adjudged bankrupt or made a composition or arrangement with his creditors; and

(l)                That he has been guilty of any fraud or fraudulent breach of trust.

Where any such facts or offences are proved the court may either

(i)                Refuse the discharge or;

(ii)              Suspend the discharge for such period as it thinks fit; or

(iii)            Suspend the discharge until a dividend of not less than 10 shillings in the pound has been paid to the creditors; or

(iv)            Grant a discharge subject to the condition that the bankrupt consents to a judgment being entered against him for any balance or part of any balance of the debts still remaining unpaid to be discharge out of his future earnings or after acquired property.

The court has a similar power where the BANKRUPT has made a settlement of property before and in consideration of marriage at a time when he was unable to pay his debts without the aid of such settled property or has contracted in consideration of marriage to settle on his wife or children property to be subsequently acquired by him and it appears to the court that the settlement or contract was made in order to defeat or delay creditors or was unjustifiable having regard to the state of affairs at the time it was made.  ( this is called a fraudulent settlement within the context of Section 30 of BA)

Where a bankrupt is discharged unconditionally, it is his duty until the judgment or condition is satisfied to give the official receiver any information he may require about his earnings or after acquired property and to file in court an annual statement verified by affidavit giving particulars of any property or income acquired since discharge. 

At any time after the expiration of 2 years from the date of the order, the terms and conditions of that order may be varied by the court if the bankrupt can satisfy the court that there is no reasonable probability of his being in a position to comply with them.  A discharge bankrupt notwithstanding his discharge must continue to give the trustee any assistance he may require in the realisation and distribution of the estate and if he fails to do so, he is guilty of contempt of court. the court may also revoke his discharge if it thinks fit but without prejudice to the validity of any disposition of this property  which occurred after the discharge and before its revocation.

Effect of Order of Discharge:

An order of discharge under Section 32 BA releases the bankrupt from all debts provable in bankruptcy except the following:

1.                   Debts due to the government for breach of a statute relating to any branch of the public revenue or on a recognizance unless the Permanent Secretary to the Treasury gives a written consent to his release therefrom;

2.                  Debts incurred by fraud or fraudulent breach of trust;

3.                  Any liability under a judgment against him in an action for seduction or under an affiliation order or under a Judgment against him as a correspondent in a matrimonial cause unless the court orders otherwise;

An order of discharge does not release any person who at the date of the receiving order was a partner co-trustee or surety of the bankrupt.  The order releases the bankrupt from all personal disabilities imposed upon him as a result of the adjudication other than those which by statute continue to apply for a fixed period after his discharge.  He is only released from this if he obtains a certificate of misfortune.  The Order will not however free him from any liability to be prosecuted for any bankruptcy offences which he may have committed.

BANKRUPTCY OFFENCES:

Generally while the fact that a person has been adjudicated bankrupt does not in itself give rise to any criminal liability, the bankrupt may be guilty of one or more or the offences specified in the BA if he has misconducted himself with regard to his affairs either before or during the currency of the Bankruptcy.

There are various categories of offences the most elaborate ones are in the first category

1.             miscellaneous offences;

this are quite lengthy ranging from a to t.  under section 138 sub section 1 any person who has been adjudged bankrupt or in respect of whose estate a receiving order has been made shall be guilty of an offence unless he proves that he had no intent to defraud

(a)                If he does not to the best of his knowledge and belief fully and truly discover to the trustee or of his property and how and to whom and for what consideration and when he disposed of any part thereof except such part as has been disposed off in the ordinary way of his trade or laid out in the ordinary expense of his family; non-disclosure

(b)               If he does not deliver up to the trustee or as he directs all or such part of his property which is in his custody or under his control and which he is required by law to deliver up, and this constitutes the offence of non-delivery of property

(c)                If he does not deliver up to the trustee or as he directs all books documents papers and writings relating to his property or affairs this constitutes the offence of non-delivery of books or documents

(d)               If after the presentation of a bankruptcy petition or within two years next before presentation he conceals any part of his property to the value of 200/- or more or conceals any debts due to or from him this constitutes the offence of concealment of property

(e)                If after presentation of a bankruptcy petition or within two years next before presentation he fraudulently removes any part of his property to the value of 200/- or more this constitutes offence of removal of property;

(f)                 If he makes any material omission in any statement relating to his affairs, this constitutes omission in statement of affairs;

(g)                If knowing or believing that a false debt has been proved by any person under the Bankruptcy he fails within one month to inform the trustee this constitutes not informing trustees of false claims;

(h)               If after presentation of a petition he prevents the production of any book document paper or writing affecting or relating to his property or affairs unless he proves that he had no intent to conceal the state of his affairs or to defeat the law this is the offence of preventing production of books or documents;

(i)                 If after presentation of a petition or within two years next before presentation he conceals destroys mutilates or falsifies or is privy to the concealment, destruction, mutilation or falsification of any book or document affecting or relating to his property or affairs unless he proves that he had no intent to conceal the state of his affairs or to defeat the law, this constitutes destruction of books or documents;

(j)                 If after presentation of a bankruptcy petition or within two years next before presentation he makes or is privy to the making or any false entry in any book or document affecting or relating to his property or affairs unless he proves that he had no intent to conceal the state of his affairs or to defeat the law this constitutes the offence of false entry in books or documents;

(k)                If after presentation of a bankruptcy petition or within two years next before presentation he fraudulently parts with, alters or makes any omission in or is privy to fraudulently parting with, altering or making any omission in any document affecting or relating to his property or affairs, this constitutes the offence of parting with or altering of documents;

(l)                 If after presentation of a bankruptcy petition or at any meeting of his creditors within two years next before presentation he attempts to account for any part of his property by fictitious losses or expenses this constitutes accounting for property by fictitious losses;

(m)             If within two years next before the presentation of a petition or after presentation but before the making of a receding order he by any false representation or other fraud has obtained any property on credit and not paid for it, that is termed obtaining property on credit by fraud;

(n)               If within two years next before presentation of a petition or after presentation but before the making of a receiving order he obtains under the false pretence of carrying on business and if a trader or dealing with the ordinary way of his trade any property on credit and does not pay for it this constitutes obtaining property on credit on pretence of carrying on business;

(o)                If within two years next before presentation of a petition or after the presentation but before the making of a receiving order he pawns, pledges or disposed of any property which he has obtained on credit and not paid for it unless in the case of a trader the pawning pledging or disposing is in the ordinary way of his trade and unless in any case he proves that he had no intent to defraud that offence is termed pawning property obtained on credit;

(p)               If he is guilty of any false representation or other fraud for the purpose of obtaining the consent of his creditors or any of them to an agreement with reference to his affairs or his bankruptcy this constitutes obtaining consent of creditors by fraud;

(q)                If he makes default in payment for the benefit of creditors of any portion of her salary or other income in respect of the payment of which the court is authorised to make an order this constitutes default in payment;

(r)                 If within one year immediately preceding the date of the making of the receiving order he has continued to trade or carry on business after knowing himself to be insolvent this constitutes trading when insolvent;

(s)                If within 6 months before the making of a receiving order he sends goods at a price lower than cost unless he proves that he had no intention to defraud his creditors this constitutes selling goods below cost price;

(t)                 If he has contracted any debt provable in the bankruptcy without having at the time of contracting it any reasonable or probable ground or expectation or being able to pay it this constitutes miscellaneous offences.

2.            Fraud by the Bankrupt;

Section 140 sub section 1 states that any person who has been adjudged bankrupt or in respect of whose estate a receiving order has been made is guilty of an offence in the following 3 cases;

(a)                If in incurring any debt or liability he has obtained credit under any false pretences or by means of any other fraud;

(b)               If with intent to fraud any of his creditor he has made or caused to be made any gift or transfer or charge on his property;

(c)                If with intent to defraud his creditors he has concealed or removed any part of his property since or within two months before the date of any unsatisfied judgment or order for payment of money obtained against it.

3.            Obtaining Credit:

An undischarged bankrupt is guilty of an offence under Section 139(b) in the following two cases:

(a)                If either alone or jointly with any other person obtains credit over a 100/- or more from any person without disclosing that he is an undischarged bankrupt; or

(b)               If he engages in any trade or business under a name other than that under which he was adjudicated without disclosing to all persons with whom he enters into any business transactions the name under which he was adjudicated bankrupt.

4.            Gambling:

Section 141(1) provides that any person who has been adjudged bankrupt or in respect of whose Estate a receiving order has been made shall be guilty of an offence if having been engaged in any trade or business and having outstanding at the date of the receiving order any debts contracted in the course and for the purposes of that trade on business:

(a)                He has within two years prior to the presentation of the petition materially contributed to or increase the extent of his insolvency by gambling or by rush and hazardous speculation and the gambling or speculations are unconnected with his trade or business or;

(b)               He has between the date of presentation of the petition and the date of the receiving order lost any part of his estate by gambling or rush and hazardous speculation or

(c)                On being required by the official receiver at any time or in the cause of his public examination by the court to account for the loss of any substantial part of his Estate incurred within a period of a year next preceding the date of the presentation of the petition or between that date and the date of the receiving order he fails to give a satisfactory explanation of the manner in which the loss was incurred.

5.                   Failure to keep proper books:

Section 142 (1) BA provides that any person  who has been adjudged bankrupt or in respect of whose estate a receiving order has been made shall be guilty of an offence if having been engaged in any trade or business during any period in the 3 years immediately preceding the date of presentation of the petition he has not kept proper books of account throughout that period and throughout any further period in which he was so engaged between the date of the presentation of the petition and the date of the receiving order or has not reserved all books of accounts so kept.

6.            Bankrupt Absconding with Property:

Section 143 BA provides that if any person who is adjudged bankrupt or in respect of whose estate a receiving order has been made after the presentation of a petition or within 6 months before presentation quits Kenya or attempts or makes preparation to quit Kenya, he shall unless he proves that he had no intent to defraud be guilty of an offence.

 

The Official Receiver and Trustee in Bankruptcy

The office of the official receiver is set up under section 74 of the BA which provides that there shall be an official receiver of debtors estate in Kenya and as many deputy official receivers as may be required from time to time who shall have the jurisdiction in such areas as may be specified.

They are officers of the court to which they are attached. On the making of a receiving order the official receiver becomes by virtue of his office receiver of the property of the debtor. Upon the making of an adjudication order the official receiver becomes trustee until the appointment of some other trustee. He also acts as trustee in the following cases:

1.      during any vacancy in the office of the trustee

2.     upon release of the trustee

3.     in small bankruptcies

4.     in the administration in bankruptcy of the estate of a deceased person unless and until a trustee is appointed by the creditors

5.     in a composition or scheme of arrangement until a trustee is appointed

The duties of the official receiver

He has duties both as regards the debtor’s conduct and the administration of his estate under section 75 of the statute.

The duties as regards the debtor’s conduct

This is under section 76 of the BA. It is the duty of the official receiver:

1.      to investigate the conduct of the debtor and to report to the court stating whether there is reason to believe that the debtor has committed any acts which constitutes an offence under the statutes or which would justify the court in refusing, suspending or qualifying an order of his discharge

2.     to make such reports concerning the conduct of the debtor as the court may direct

3.     to take such part as he may deem fit in the public examination of the debtor

4.     to take such part and give such assistance in relation to the prosecution of any fraudulent debtor as the Attorney-General may direct.

Duties regarding the debtor’s estate

He has the following duties:

1.      pending the appointment of a trustee to act as the receiver of the debtor’s estate and as manager thereof where a special manager is not appointed

2.     to authorize the special manager to raise money or make advances for purposes of the estate in any case where in the interests of the creditor it appears necessary to do so

3.     to summon and preside at the first meeting of creditors

4.     to issue forms of proxy for use at the meeting of the creditors

5.     to report to the creditors as to any proposal which the debtor may have made with respect to the mode of liquidating his affairs

6.     to advertise the receiving order the debt of the creditor’s first meeting and of the debtor’s public examination and such other matters as may be necessary to advertise

7.     to act as trustee during any vacancy in that office

Special manager

If the debtor’s business is such as to require expert or technical knowledge in its administration any creditor may request the official receiver to appoint a special manager who may be the debtor himself to carry on the business until the trustee is appointed. Here the official receiver is not bound to appoint a special manager but may do so if satisfied that the nature of the debtor’s estate of business or the interests of the creditors require it.

The special manager must give security as directed by the court. He must submit accounts verified by affidavit to the official receiver who must approve them and then add them on to his own account.

The renumeration of the special manager is fixed by the creditors in general meeting or if not so fixed then by the court.

The official receiver may remover the special manager at any time if his continued employment seems unnecessary or unprofitable to the estate and must do so if required by a special resolution of the creditors

Appointment of trustee

This is provided for by section 78 and 79 of the statute which provides that any fit person whether a creditor or not may be appointed trustee either

1.      by creditors by ordinary resolution

2.     by the committee of inspection set up under section 22 when the creditors resolve to leave the appointment to them.

In the case of an appointment by the creditors or the committee of inspection the court may object to the appointment on the ground that the trustee has not given sufficient security which he is required to do. However if the court is satisfied with the security given it may grant a certificate of appointment under section 22 the creditors may at their first or any subsequent meeting appoint a committee of inspection for the purpose of superintending the administration of the bankruptcy property by the trustee.

The powers of the trustee

These are divided into two, namely:

1.      those powers that may be exercised with the permission of the committee of inspection under section 60

2.     those powers that may be exercised without permission of the committee of inspection under section 59 of the statute

Powers exercisable with permission of the committee of inspection

Here the trustee may do all or any of the following things:

1.      carry on the business of the bankrupt so far as may be necessary for the beneficial winding therefore

2.     bring, institute or defend any action or other legal proceeding relating to the property of the bankrupt

3.     employ an advocate or other agent to take any proceeding or do any business which may be sanction by the committee of inspection

4.     accept as the consideration for the sale of any property of the bankrupt a sum of money payable at a future time subject to such stipulations as to security and otherwise as the committee may think fit

5.     mortgage or pledge any part of the property of the bankrupt for the purpose of raising money for the payment of his debts.

6.     refer any dispute to arbitration and compromise any claims whether by or against the bankrupt on such terms as may be agreed on.

7.     divide in its existing form amongst the creditors according to its estimated value any property which from its peculiar nature or other special circumstances cannot readily or advantageously be sold

8.     appoint the bankrupt himself to superintend the management of his property or carry on his trade for the benefit of creditors or help in the administration of the property in such manner as the trustee may direct under section 61 of the BA

9.     give the bankrupt some maintenance allowance for his services under section 62

Powers exercisable without permission of the committee of inspection

Provided for under section 59 and here the trustee may all or any of the following things:

1.      sell all or any part of the property of the bankrupt by public auction or private contract and transfer it to the purchaser

2.     give receipts for any money received by him which will effectually discharge persons paying it from any responsibility in  respect of the application thereof.

3.     prove, rank, claim and draw a dividend in respect of debts due to the bankrupt

4.     deal with any property to which the bankrupt is beneficially entitled as tenant in the same manner as the bankrupt might have dealt with it

5.     exercise any powers vested in him under the Act and execute any powers of attorney, deeds or other instruments for the purpose of exercising such powers

6.     hold property of any description, make contracts, sue and be sued but he must obtain permission to defend actions, enter into any engagement binding himself and his successors in office and do all other acts necessary or expedient to be done in the execution of his office in his official name

DISTRIBUTION OF THE ESTATE:

Provisions relating to this are to be found in the second schedule to the BA.  Any creditor who wishes to make a claim against the estate of the Bankrupt must prove his debt to the satisfaction of the Trustee.  The Trustee is under a duty to convert all the Bankrupt’s property which is divisible among creditors into money and to distribute the proceeds by way of dividends among creditors who have proved in accordance with a due order of priorities and in proportion to the amounts due to them.  Up until he has proved his debt a creditor is not entitled to vote at any meeting of creditors or to receive any dividend.

DEBTS PROVABLE IN BANKRUPTCY

(a)                Approvable Debts

Section 35 (3) B.A. states that all debts and liabilities present or future certain or contingent  to which the data is subject at the date of the receiving order or to which he may become subject before his discharge by reason of any obligation incurred before the date of the receiving order are deemed to be depths provable in bankruptcy.

(b)          Non – Provable Debts

The following debts are not provable in bankruptcy

(i)                 Claims for unliquidated damages in tort;  this is under Section 35(1) B.A.  herein demands in the nature of unliquidated damages arising otherwise than by reason of a contract promise or breach of trust are not provable in bankruptcy.  Therefore claims arising out of a tort committed by the bankrupt cannot be proved unless the damages become liquidated by agreement or judgment before the dates of the receiving order.  A claim arising out of a breach of contract fraud or breach of trust cannot be excluded merely because the claim might alternatively be founded in tort.

(ii)               Debts incurred after notice of unavoidable act of bankruptcy under Section 35(2) B.A.

(iii)             Debts incapable of being fairly estimated under Section 35(6) of B.A.

(iv)             Debts incurred after the date of the receiving order Section 35(3) BA

(v)               Unenforceable Debts: these are debts founded on an illegal or immoral consideration or statutes-barred debts;

(vi)             Alimony and maintenance – the common law liability of a husband to maintain his wife is not a contractual liability and therefore does not constitute a provable debt.

(c)          Contingent Liabilities

A contingent liability is one which at the date of prove is not certain to arise.  It is dependent upon the happening of some event which may or may not take place.  Subject to certain rules a creditor may prove for the full value of a contingent liability

(d)          Periodical Payments:

Under Section 19 of the BA here where in rent or other payment falls due at stated periods and the receiving order is made at any time other than any one of those periods the person entitled to the payment may prove for a proportionate part thereof upto the date of the order as if payment accrued due from day to day.

(e)          Interest on Debts:

Under Section 36 B.A. here interest on debts is provable and payable.

MUTUAL DEALINGS

A creditor must subtract from what he is owed, from what he owes a debtor.

Secured Creditors

Those who hold mortgages, charges or a lien on the debtor’s property are the secured creditors.  On the debtor’s bankruptcy he may

1.                   Rely on the security and not prove at all; or

2.                  Surrender the security and prove the full amount of the debt; or

3.                  Realise his security and prove for the balance if any; or

4.                  Estimate the value of his security and prove for the balance.

Under Section 40 B.A.  a provision relating to the landlord’s power of distress, the position is somewhat similar to that of a secured creditor.  He is entitled to seize the goods of a tenant in satisfaction of the rent due to him.  In proving of debts the rules laid down in the 2^nd schedule to the Bankruptcy Act must be observed.

ORDER OF PAYMENTS:

The Assets remaining after payment of the expenses properly incurred in preserving, getting in and realising the assets of the bankrupt must be paid out in the following order of priority:

1.                   Costs and Charges incurred in the administration of the Estate;

2.                  Preferential Depths;

3.                  Unsecured debts;

4.                  Deferred Debts;

5.                  if there is any surplus this is to be returned to the Bankrupt.  Section 38-39 B.A.

6.                  Distribution 66-73 BA

SMALL ESTATES:

Under Section 120 if a petition is presented and the value of the debt is not more than KShs. 12,000 the court may order that the debtor’s Estate be administered summarily whereupon the provisions of the BA will apply subject to the following modifications.

1.                   Should the debtor be adjudged bankrupt, the official receiver shall be the Trustee in Bankruptcy;

2.                  There is no committee of inspection, everything is done by the official receiver;

3.                  Everything else may be modified to simplify the procedure except for the provisions relating to examination and discharge of the debtor.

HIRE PURCHASE

The Kenyan Hire Purchase Law is governed by the principles of the English common law as modified by the Hire Purchase Act Cap 507 of the Laws of Kenya.  At common law a hire purchase agreement is defined as a contract for the delivery of goods under which the Hirer is granted an option to purchase the goods.  The agreement is a hybrid form of contract in that it is neither a simple bailment nor a contract of sale but combines elements of both. 

The original position at common law is that there are no formal requirements for a hire purchase agreement.  An oral agreement is valid and binding.  The question of capacity to enter into Hire Purchase Agreement is governed by the normal rules of contract law.  because the Hire Purchase Agreement is a form of bailment, it only applies to goods as defined in the Sale of Goods Act.  The terms of a Hire Purchase Agreement must be stated with certainty and precision so as to enable the court to ascertain the intention of the parties.  The parties to the agreement must reach consensus ad idem.

If  the dealer fraudulently completes a document signed in blank by the hirer, then no valid hire purchase contract results.  Should the nature of the document which the hirer signs be misrepresented to him so that he signs in the belief that it is something essentially different from what it is the hirer can plead non est factum (it is not my deed or it is not my act) and therefore escape liability.   If there is a change in the condition of the goods between the time of the offer and acceptance, again no valid agreement comes into force. 

In the case of an agreement between the dealer and the hirer without the intervention of a finance company, a legally binding hire purchase agreement comes into existence when the dealer posts a letter of acceptance to the hirer or delivers the goods.

Where the finance company finances the transaction, although the dealer is supplying the goods, the owner of the goods at the relevant time is a finance company.  The hirer therefore contracts with a finance company when he enters into a hire purchase agreement.  Thus there must be acceptance by the finance company and communication of that acceptance to the hirer which is normally done by posting him a copy of the agreement showing execution by the company.

A hire purchase transaction has been described as a triangular transaction  with the Dealer and the Hirer at the bottom and the Finance company at the top.

The question arises as to the effect of the delivery of goods by the dealer to the hirer before acceptance by the finance company.  As far as the obligations of the hirer are concerned, until acceptance of his proposal by the finance company the hirer holds the goods as a bailee of the dealer.  Such bailment can be terminated at the will of the dealer or the hirer.  It however continues until the finance company purchases the goods from the dealer and executes the hire purchase agreement.  When this is done, the bailment as between the dealer and the hirer terminates and is replaced by the hire purchase agreement between the finance company and the hirer.

The hirer thereafter holds the goods as a bailee of the finance company under the terms of the Hire Purchase Agreement.  Should the finance company refuse to accept the transaction, the bailment between the dealer and the hirer or is terminable by the dealer. 

Before the finance company executes the hire purchase proposal the hirer in possession of the goods owes the dealer a duty to take reasonable care of the goods, the breach of which gives the dealer a right of action under the tort of negligence or if wilful damage is caused to the goods then trespass to goods.  If the finance company refuses to accept the transaction the hirer could be held liable in quasi contract to pay the dealer a reasonable charge for the use of the goods.

Pending acceptance of the transaction by the finance company the hirer can use the goods at will as bailee if there are no restrictions agreed between him and the dealer.  The dealer at that stage does not owe the hirer any contractual duty as to fitness of the goods or their suitability because there is no contract between them but simply a loan of the goods.  Should however the hirer be injured, due to defects in the goods, which the dealer knows or ought to know, the hirer can maintain an action in tort for negligence.

If the proposal is not acceptable by the Finance Company, no contract comes into existence in relation to the goods hence the bailment between the dealer and the hirer terminates.

The liability of the finance company for the condition of the goods does not start until it has entered into a higher purchase agreement.

Note that hire purchase agreements must not be impossible to perform, contain a mistake on the part of either party or be illegal.

 

THE PASSING OF PROPERTY

There is no distinction between property and title under Hire Purchase.  This is because property which essentially means ownership of the goods does not pass to the hirer till the option to purchase has been exercised.  Thus the hirer has the right to return the goods and terminate his liability at any time. 

Under Section 2 of the Factors Act of England 1889 which is a statute of general application to Kenya if a Mercantile Agent disposes of the goods in his possession with the consent of the owner he passes a good title to a bona fide purchaser for value without notice.  If then goods are lend to a hirer who is a mercantile agent he cannot pass a good title to a 3^rd party since the goods are let to him in his personal capacity and not in the capacity of a mercantile agent.

Section 22 of the English Sale of Goods Act of 1893 provides that a sale to a bona fide purchaser in market overt according to the usage of the market passes a good title even if the seller had no title.  This therefore operates as an exception to the nemo dat principle under Hire Purchase.   This exception however does not operate under Kenyan law.

Sometimes the owner of the goods hired to the hirer who has resold them may voluntarily relinquish his title to them after being paid and hence good title passes to subsequent purchasers.  This is not quite an exception to nemo dat but a modification of it.

The hirer under a hire purchase agreement possesses a contractual right to acquire ownership of the goods upon payment of all instalments due and the exercise of the option to purchase.  The question arises can the hirer therefore assign the benefit of the Agreement?

At common law if a contract is silet on assignment then the hirer can assign but if it specifically prohibits assignment then he should not assign.

REPOSSESSION BY THE OWNER

At common law an owner of goods is entitled to repossess them once the bailment ceases or terminates.  A hire purchase contract may provide that if the hirer commits a specified breach then the agreement terminates whereupon the owner is entitled to possession of the goods.  In cases of resale of the goods by the hirer the hirer cannot pass a good title hence the owner can repossess the goods from the innocent purchaser.  The owners claim to damages will be limited to the unpaid balance of the hire purchase price.  Should judgment be entered against the hirer, the judgment creditor is not permitted to cease goods the subject matter of a hire purchase agreement. 

If the hirer does not disclose this fact to the judgment creditor and the hire purchase goods are seized unsold the owner cannot maintain an action for conversion against an innocent purchaser but he can recover the price for which the goods were sold in an action for money had and received.  If the goods have not yet been sold then the owner is entitled to possession of them from the judgment creditor.

In cases where the hirer is a tenant of leasehold premises and he fails to pay rent, the landlord may re-enter the premises and seize all goods therein whether they belong to the tenant or not.  For the owner of the goods hired to be protected, he must serve notice to the landlord that those goods belong to him.  Only then can he repossess them.

Where the hirer is adjudged bankrupt all his property vests in the trustee in bankruptcy for distribution among creditors. But this does not apply to goods let on hire purchase when the owner serves a notice to the hirer withdrawing his consent to possession of the hired goods.  The owner must do this before the hirer is adjudged bankrupt.

Finally if hired goods are delivered to a bailee for repair the bailee has a particular lien on the goods till his charges are paid by the hirer.  If the owner is entitled to terminate the hiring, the repairer can still claim a lien as against the owner. 

In all the foregoing circumstances of the owner of the goods repossess them, prima facie the hirer cannot claim relief against forfeiture of the goods or the payments already made.

THE MINIMUM PAYING CLAUSE AND DAMAGES

In addition to the common law owners right of repossession of the hired goods the owner may seek damages.  Goods let on hire purchase depreciate in value because of user.  The owner seeks to pass the risk of depreciation on to the hirer by providing in the Agreement that the hirer shall make a minimum payment for the period the hirer has used the goods.  This is normally labelled ‘compensation for depreciation’.

The question is can the owner sue the hirer for the sums stated in the minimum payment clause or can the hirer refuse to pay because the amount is a penalty and not liquidated damages?

Common law courts took the position that it is for them to determine the measure of damages payable in the event of breach of contract.  If the damages agreed between the parties is not a genuine pre-estimate of the loss likely to be incurred upon breach the courts will strike it down as a penalty.

There are 3 circumstances under hire purchase which invite the operation of the minimum payment clause.

1.                   In the case of the hirer’s breach of contract, the minimum payment clause will be regarded as a penalty and hence be struck out whereupon the court will assess the amount of damages payable.

2.                  In the case of voluntary termination of the contract by the hirer by returning the goods the minimum payment clause will be enforced.

3.                  The minimum payment clause will be enforced in the case of involuntary termination of the contract where either the hirer dies or becomes bankrupt.

DAMAGES FOR BREACH OF CONTRACT

If the hirer commits a breach of any of the terms of hire purchase agreement the owner may claim damages.  The hirer has several obligations the breach of which gives rise to damages namely

1.                   the obligation to take delivery of the goods,

2.                  the duty to take care of the goods,

3.                   the obligation to pay the instalments and

4.                  the obligation to continue the hiring for the agreed period. 

Here the owner’s rights upon the hirer’s breach are termination of the agreement, and a claim for damages.

CAVEAT EMPTOR UNDER HIRE PURCHASE

The obligations of the owner to the hirer are contained in the express or implied terms of the agreement.  Besides express terms there are several implied terms

1.                   There is an implied condition in the hire purchase agreement that the owner of the goods has title to them.

2.                  There is an implied warranty in a hire purchase agreement that the owner in addition to putting the hirer into possession of the goods will leave him into peaceful position of them during the currency of the agreement.

3.                  At common law there is an implied term in all hire purchase agreements that the goods are fit for the purpose for which they are let.

4.                  At common law there is an implied term that the goods will correspond with their description.

It may also be observed that there is an obligation cast on the owner to deliver goods to the hirer.  If the goods let under a hire purchase agreement are not fit for their purpose  these amounts to a breach of contract that entitles the hirer to treat the contract as repudiated, reject the goods and claim for what he has paid as well as damages.

Apart from liability in contract the owner may be liable in tort for negligence if he knew or ought to have known of a defect in the goods which causes injury to the hirer.

As a standard form contract drafted by the owner, the hire purchase agreement often contains clauses excluding implied terms of the contract.  These are the exemption clauses or exclusion of liability clauses.  The court construes exemption clauses strictly and subject them to the doctrine of fundamental breach and breach of a fundamental term.

THE KENYA HIRE PURCHASE ACT 1968

Before the passing of the Kenyan Hire Purchase Act in 1968 the prevailing law was that English common law vide the Indian Law of Contract, the Kenyan Hire Purchase Act commenced operation on 2^nd November 1970.  As far as formalities are concerned, Section 3 stipulates that the Act applies to all Hire Purchase Agreements for goods whose hire purchase price does not exceed the sum of 300,000/-.  This is via an amendment to the Act which was made in 1991 and at the time of the enactment the financial ceiling was only 80,000/=.

Secondly the Act does not apply to bodies corporate who are hirers.  The assumption of the statute is that if you are a private limited liability company you need no protection from the Hire Purchase Act.

Section 4 establishes a registry of Hire Purchase Agreements presided over by a registrar, his or her deputy and assistant.  By virtue of Section 5(1) of the statute all hire purchase agreements must be registered within 30 days of execution upon payment of a registration fee. But there is a discretion vested in a registrar to extend the time for registration if satisfied that the failure to register was accidental or inadvertent. 

The consequences of non-registration are grave for the owner under Section 5(4).

1.                   No person shall be entitled to enforce the agreement against the hirer or any contract of guarantee and the owner cannot recover the goods from the hirer.

2.                  No security given by the hirer or guarantor shall be enforceable.

Under Section 5(2) the agreement must be in the English language. 

The information that must be contained in the Agreement is provided for in Section 6 of the statute.

1.                   The cash price of the goods as well as the hire purchase price must be stated. 

2.                  Secondly the amount of each instalment and a period of repayment must be stated.

The requirement as to the cash price may be satisfied in two ways as per Section 6(1)

1.                   If the hirer has inspected the goods or like goods and at the time of his inspection tickets or labels were attached to or displayed with the goods clearly stating the cash price either of the goods as a whole or of all the different articles comprised therein then the requirement as to the cash price is satisfied.

2.                  If the hirer has selected the goods by reference to a catalogue pricelist or advertisement which clearly stated the cash price either of the goods as a whole or the different articles then the requirement as to the cash price is fulfilled.

Non compliance with the provisions of Section 6 will make the agreement unenforceable against the hirer and the guarantor. There are some other requirements under Section 6.  The agreements must be made and signed by the hirer and by or on behalf of all the other parties.  It must contain notice in a prominent form stipulating the right of the hirer which are basically the right of the hirer to terminate the agreement and the restriction on the owner’s rights to repossess the goods.  A copy of the agreement must be delivered or sent by registered post to the hirer within 21 days of the date of the agreement.