How and when a person can be declared bankrupt

In tragic times we are accustomed to feeling injustice at how unfairly the world has treated us rather than accept it as an act of God that defies explanation.

As John Stewart Collins put it, though “the worm forgives the plough”, sometimes a series of unfortunate events have no explanation or justification and can only teach us to persevere if they don’t break us.

James Mwangi Nderitu and his wife, Joyce Wangechi Mwangi, also partners in business, thought they had had enough and chose the dreaded path — they sought to be declared bankrupt.

The two, trading as Jajo Enterprises, started an agrovet business in 2002. They sold agrochemicals, veterinary products, animal feeds, mineral licks and seeds at their shop in Naroosura, Narok County. As the business grew, they opened another shop at Ewasonyiro centre, still in the same county.

Then tragedy struck in 2007/8 when Kenyans descended on one another during the post-election violence. The couple lost everything to thieves who looted their properties.

Later, months after the violence ended and as the economy improved, the couple decided to expand their business and therefore took a Sh4 million loan to grow tomatoes on a 27-acre piece of land in Narok.

Unfortunately, a pest known as Tuta absoluta and tomato spotted wilt virus disease destroyed the crop. This notwithstanding, their creditors demanded payment. Also grappling with a difficult business environment, they closed their two shops.

In the petition filed before the High Court, Mr Nderitu said he was also struggling to pay a loan he had taken from Equity Bank to purchase a vehicle, which was also involved in a crash in November 2016. He repaired the vehicle and sold it to shore up his business.

Believing that their financial troubles had become too much, they moved to court seeking protection by being declared bankrupt. They argued that rather than being committed to civil jail, they should be declared bankrupt.

In total, the couple said they were indebted to a tune of Sh9,795,370 to about 20 creditors. The creditors included Osho Chemical Industries Limited, which supplied them various agro-vet products and were demanding Sh3.2 million.

They also owed Twiga Chemical Industries Ltd Sh986,007 and Amiran Kenya Ltd Sh1,106,901.

His wife told the court in a different bankruptcy suit that she was a housewife although she assisted in running a local community-based organisation where she earned Sh15,000. She used the money for her upkeep and that of her children.

In his ruling, Justice David Majanja said under section 32(1) of the Insolvency Act, 2015, a debtor is entitled to apply to be adjudged bankrupt because he or she is unable to pay his or her debts. He said by looking at her statement of affairs and her evidence, he was satisfied that she was unable to pay her debts.

“Although the debtor is earning some money for his upkeep, I am satisfied that the debtor is unable to pay his debts,” Justice Majanja said on the application by Mr Nderitu.

With the decision, the couple’s property will be taken over by the official receiver or any other person nominated by the official receiver, as trustee.

Although the application by the couple was accepted, there are instances when the court has rejected a petition by an individual seeking to be declared bankrupt.

Last year, Justice James Makau rejected an application for bankruptcy by Albert Kubai Mbogori, who was being sought over a Sh18 debt million, arising from compensation to the family of businessman he fatally shot dead 13 years ago.

The judge rejected the petition saying Mbogori failed to fulfil the requirements set out in bankruptcy proceedings.

“In view of the above, I am not satisfied that the petitioner has demonstrated his inability to pay the sum due to the creditor,” said the judge.

According to Justice Makau, a person who refuses to divulge to the court all the relevant material information and opts to give half-baked information to enable the court to assess his inability to pay the debt takes the risk of having the petition rejected.

The judge added that the petition was a ploy to avoid paying the debt. The man was later arrested and sent to civil jail.

In the ruling, Justice Makau said the bankruptcy process is meant to protect genuine people who have unfortunately found themselves in debt, “but not fraudsters or con men”.

While moving to court, Mbogori said he was unable to pay the money, which was meant to be compensation to the family of Edward Benjamin Rahedi. He told the court that he has been depending on his wife for upkeep and it was her who paid for the house rent and children’s school fees.

Mr Mbogori also said his friends and relatives were organising a fundraiser for him and he was extremely remorseful over the incident.

The man was accused of shooting dead Mr Rahedi in a road rage incident on December 1, 2007. He was arrested and charged with murder after Mr Rahedi died.

The High Court found guilty of manslaughter and jailed him for 14 months. Mrs Rahedi later filed the case seeking damages for loss of dependency and expectation of life. She successfully argued that Mbogori negligently fired the bullet, leading to her husband’s death.

Justice Hatari Waweru then ordered Mbogori to pay the family Sh12.5 million as compensation. Mrs Rahedi was to get Sh7 million while her two children were to get Sh2 million each, while Mr Rahedi’s father was to get Sh500,000.

Mbogori filed an appeal but it was dismissed by Court of Appeal judges who said the amount was justified. It was then that he filed a bankruptcy case.

Another businessman’s application was similarly dismissed by Justice Francis Tuiyott last year, after seeking a temporary order to allow him to plan for the repayment of a debt.

Mr Rajendra Ratilal Sanghani moved to court fearing that his creditor — Schoon Ahmed Noorani — would call up the debt.

Evidence presented in court showed that both were good friends and Mr Noorani had advanced Sh477 million to Mr Sanghani.

Although the debtor called his creditor a shylock, the latter maintained that he was an investor but advanced the money to his friend who was expected to repay it with an interest.

Mr Sanghani told the court that talks or arrangements to pay the debt by instalments had collapsed.

Under Section 304 of the Insolvency Act, a debtor can seek interim orders to allow the debtor to make a proposal, which provides for a person to act as supervisor of the voluntary arrangement.

In his ruling, Justice Tuiyott said the overall design of the Act is to give a distressed debtor a second chance.

However, he said an application should be disallowed at once if it is clear that the motive is to attain a collateral objective of granting protection to an undeserving debtor.

“While the Court is not expected to carry out a detailed examination as to the fortunes (perhaps misfortunes) of the debtor, the evidence presented must be such as to make out a prima facie case that the debtor is insolvent and is unable to pay his/her debts,” the Judge said.

He said a debtor is then required to give a true and full inventory of his creditors and debtors and other liabilities and assets.

In Mr Sanghani’s case, the judge noted that the businessman failed to give particulars of his other creditors and debtors and other liabilities and assets.

The application was rejected after it was discovered that the businessman had vast properties, including buildings in Nairobi’s Riverside area as well as in Mombasa.