Why bankruptcy is no longer an easy route out of your debt troubles

What you need to know:

  • Previously, the average number of cases filed per year was 300.

  • However, after the Insolvency Act of 2015 was passed, the number has fallen to 15 bankruptcy cases a year.

  • After insolvency has been declared, a trustee is appointed to manage the individual’s estate.

Three years after the old Bankruptcy Act was repealed, the number of cases filed under the now-tightened Insolvency Act have drastically fallen — meaning that people were filing for bankruptcy to evade paying their debts.

The now repealed law had been in use for about 85 years, with little amendment over the years, and had become an easy way out of debt for many individuals who knew exactly how to manipulate the system and get away with it.

Previously, the average number of cases filed per year was 300. However, after the Insolvency Act of 2015 was passed, the number has fallen to 15 bankruptcy cases a year, which means it is no longer easy to escape debt.

“We used to get about 300 (bankruptcy) files per year, mostly because so many insurance companies were going down. Another reason was fraud, because you would find a matatu that carries 12 people had over 30 people claiming money from the owner, who would then file for bankruptcy after the victims get judgments,” Mr Mark Gakuru, the Official Receiver based at the State Law Office told the Nation in an interview.

In fact, hundreds of bankruptcy petitions filed between 1993 and 2013 — by individuals and companies — were directly linked to the collapse of insurance firms.

RETIREMENT

In that period alone, insurance companies that met their death were Access Insurance (1993), the State-owned Kenya National Assurance Limited (1995), Lakestar Insurance (2002), Liberty Insurance (2003), United Insurance (2005), Invesco Insurance (2007), Standard Assurance (2008) and Blueshield Insurance (2011).

The collapse of insurance firms left many people to be declared bankrupt, after their debts exceeded the value of their assets.

Former Kenya Defence Forces (KDF) soldier Joseph Mathu Kibe is one of them. Mr Kibe used to own a lorry that he used for a transport business until April 16, 1992, when the vehicle was involved in an accident.

The crash claimed the life of one Patrick Mwangi Mbuthia, whose widow sued the former soldier for wrongful death. The widow was awarded Sh1.6 million as damages, and she went after Mr Kibe and his insurer, Stallion Insurance, which had covered the vehicle.

As the case was in court, Stallion Insurance went under in 2000, leaving Mr Mbuthia’s widow to pursue the businessman for the Sh1.6 million award.

Some 23 years after the accident, Mr Kibe filed an application at the High Court asking to be declared bankrupt as he was past retirement age, unemployed, sickly, flat broke and his assets were worth only Sh30,000. By this time, his debt to Mr Mbuthia’s widow had grown to Sh2.8 million.

The court granted his request on April 8, 2016, almost 24 years after the accident.

APPLICATION

But the former soldier’s case was not unique.

Last year in October, the High Court declared businesswoman Jane Kabura bankrupt after her debts hit Sh820,000.

Ms Kabura’s troubles started when she was forcibly evicted from her shop at the Uthiru junction in Kiambu. The businesswoman contested the legality of her eviction and claimed to have lost goods worth Sh1.7 million.

Within hours of the eviction, her net worth had dropped to Sh2,600 and she opted to file for bankruptcy when creditors began demanding their dues.

So painful is the filing of bankruptcy that not even death can save one from such a situation. The law still considers individuals bankrupt if they die before discharging their debt after being declared insolvent. As such, their estates continue to be managed in an attempt to repay their creditors.

But contrary to popular belief, people like Ms Kabura, Mr Kibe others who have been declared bankrupt do not surrender their national identity cards or lose their right to vote. But they cannot run for elective positions or hold a public office.

No longer an easy route

Getting declared bankrupt is no longer an easy route out of debt troubles. While declaring bankruptcy, one will have to show the court and the Official Receiver that one’s debts far outweigh assets in their name. In court, creditors will get a chance to support or oppose the bankruptcy application.

After bankruptcy has been declared, the Official Receiver appoints a trustee to manage the individual’s estate.

Under the old Bankruptcy Act, someone who voluntarily presented himself or herself in court could nominate just about anyone to manage their estate once declared bankrupt. But the Insolvency Act now says that the bankruptcy trustee must be licensed as an insolvency practitioner.

INSURANCE

Before the Attorney-General’s office licenses an individual, he or she must submit a copy of their academic qualifications, their curriculum vitae, which must show a history of handling insolvency assignments, a Kenya Revenue Authority clearance, a certificate of good conduct and fees and insurance for professional indemnity totalling Sh80,000.

After a bankruptcy trustee has been appointed, he or she calls a creditors’ meeting, where anyone claiming money will have to prove how the debt arose. The claims are then investigated and debts paid in hierarchy of size and necessity.

But tools of trade, clothes and household furniture are exempt from attachment for purposes of paying creditors.

During the bankruptcy proceedings in a court, the insolvent individual is required to publish an advert in a newspaper of wide circulation. “We are in the process of proposing amendments to dictate the size of the advert, as some people pay for space so small that potential objectors could easily miss spotting,” says Mr Gakuru, the Official Receiver.

The amendments will consider the fact that some people genuinely cannot afford huge advertisements.

In Ms Kabura’s case, for example, High Court judge Francis Tuiyott raised an issue with the size of the advertisement placed by the businesswoman in the newspapers.

“As required by law the bankruptcy proceedings were advertised in the Daily Nation of April 17, 2018. The notice was in the page that carries classified advertisements. Advertisement is on small size. While I would say no more on it, I would think that in future there should be clear directions as to the size of the advertisement. Surely, it must be prominent enough to catch the attention of interested parties (who would include creditors),” the judge said before declaring her bankrupt.

SELF-INCRIMINATE

The Insolvency Act of 2015 has generally sealed most loopholes that allowed mischievous individuals to escape debt by filing for bankruptcy in the old days.

Banks are now obligated to provide all details of any accounts the bankrupt individual has, just in case he or she intends to secretly hold more than the legally allowed Sh100,000 at any given time.

The Official Receiver or bankruptcy trustee can also get a warrant from court to search houses or other premises if they are believed to contain evidence that an individual declared bankrupt is concealing assets.

He or she can also summon anyone believed to have information about any hidden assets.

Interestingly, once summoned under such circumstances, you do not have the right to not self-incriminate.

Concealing information from a bankruptcy trustee that has summoned you may lead to a jail term of up to six months.

Under the new laws, the bankruptcy trustee will offload one’s debts as best as possible within three years. After the three years, you get to start life debt-free, but with nothing to your name in the event your estate was unable to retain anything after debt repayment.

If you voluntarily file for bankruptcy to evade debt and then make a U-turn, it is not easy to wriggle out of the proceedings, as businessman Bhudialala Jiravji learnt in 2015.

He had filed the application to run away from a Sh75 million debt that arose from botched business relations in Kaka Wholesalers, where he had two co-shareholders — Ritesh Shobag and Saijul Shobag.

UNFORTUNATE

Mr Jiravji tried to convince Justice Francis Gikonyo that his co-shareholders were the ones in charge of the day-to-day running of the business and hence there was no fraud on his part as claimed by some creditors.

He was also confident that the judge would be convinced to instead issue a receiving order, which requires the Official Receiver to aid in barring any recovery by creditors without declaring an individual bankrupt.

But after the Official Receiver revealed that the businessman had failed to attend creditors’ meetings despite being informed and that he gave wrong addresses for creditors that stymied delivery of invitations to creditors’ meetings, Justice Gikonyo refused to have the proceedings withdrawn.

Mr Gakuru believes that the new laws have thwarted mischievous people, leaving room for his office to help the honest but unfortunate.

“Not all cases are like that (fraudsters trying to evade debt). I had one who was literally at the lowest. He was a hand cart pusher. He had assaulted someone and had to pay Sh200,000. He would give Sh5,000 every month for three years until he paid in full,” added Ms Beatrice Osicho, a State counsel at the Official Receiver’s office.