Insolvency law largely puts politician at the mercy of a trustee with respect to which property will be repossessed for the purposes of paying his debts.
Reports that the High Court has declared former Lugari MP Cyrus Jirongo bankrupt has left many wondering what life after the declaration will be for the man who had his eyes on the country’s top job only two months ago.
Mr Jirongo went into bankruptcy after his creditor, businessman Sammy Boit arap Kogo, made an application for a receiving order to be entered against the former MP.
Under Kenyan insolvency law, the term bankruptcy applies only to individuals, while the term liquidation applies to insolvency proceedings involving a body corporate.
The Insolvency Act of 2015 specifically provides for two routes to the bankruptcy of an insolvent individual.
The first is on the debtor’s own application and the second is through a creditor’s as is the case here.
Section 17 of the Act provides that in order for a debtor to be declared bankrupt on the application of a creditor, the latter must prove that either a statutory demand has been served against the former and has remained unsatisfied after a period of 21 days, or that an execution order given by the court against the debtor has remained unsatisfied.
In the Jirongo case the creditor, Mr Kogo, was unable to execute a 2014 judgment in his favour requiring Mr Jirongo to pay the Sh700 million due plus interest and costs of the suit.
For this reason the High Court deemed it suitable that Mr Jirongo be declared bankrupt.
One of the most dramatic effects of a bankruptcy order is the vesting of authority in a bankruptcy trustee. Section 3 of the Act defines the trustee as the person in charge of the bankrupt’s estate.
Bankruptcy therefore has the effect of transferring to the trustee all rights that the bankrupt had over his property.
This transfer of ownership arising from bankruptcy proceedings obviously does not take place for the trustee’s personal benefit but rather to enable the trustee wind up the bankrupt’s property for the benefit of the creditors, in accordance with the legislation and under the court’s control.
The key function of a bankruptcy trustee is to realise the assets that make up the bankrupt’s estate and distribute the proceeds according to a statutory list of priority of payments outlined in the second schedule to the Insolvency Act.
A bankrupt’s estate comprises all property belonging to or vested in him at the commencement of the bankruptcy with the exception of protected property.
“After acquired” property (or property that the bankrupt only acquires after he has been declared bankrupt) of the bankrupt does not automatically vest in the trustee for the benefit of the estate.
However, the trustee may claim for the bankrupt’s estate any property which has been acquired or has devolved upon the bankrupt since the commencement of the bankruptcy.
To exercise this right the trustee must give the bankruptcy notice after obtaining knowledge that the property has been so acquired.
This basically means that any property Mr Jirongo owned at the time his bankruptcy commenced will be automatically vested in the trustee for purposes of paying his debts.
However, any property he acquires after the commencement of the bankruptcy or that passes to him (for example, by inheritance) may not necessarily form part of the bankruptcy estate.
It is important to point out, however, that the Insolvency Act does allow the bankrupt to retain some property.
For this “protected” property the trustee will not have the legal right to sell for purposes of paying the debts of the bankrupt.
Specifically, Section 161 of the Insolvency Act provides that the bankrupt may be allowed to retain necessary tools of trade, subject to a figure fixed by the trustee.
Mr Jirongo will also retain the necessary household furniture and personal effects (including clothing) and those of his relatives and dependents subject to the figure fixed by the trustee.
He will also be allowed to keep a motor vehicle (subject to a limit of Sh1 million).
If the creditors consent by an ordinary resolution passed at a creditors’ meeting, the bankrupt may be allowed to retain goods of a higher value, although this is unlikely in practice.
The law additionally provides that the bankruptcy trustee may allow the bankrupt individual to retain Sh100,000 for his immediate maintenance.
Finally, one of the most important powers given to the trustee in bankruptcy is the power to cancel any transactions entered into by the bankrupt individual before bankruptcy, but which can be termed irregular.
The trustee in exercise of this power can recover property or money from a party, who entered into an irregular transaction with the bankrupt.
Examples of irregular transactions include an insolvent transaction, and insolvent charge and an insolvent gift.
A transaction is an insolvent transaction by a bankrupt if it is entered into or made at a time when the bankrupt is unable to pay his debts.
The effect of this is that it enables a creditor to receive more towards satisfaction of a debt than he would receive in the bankruptcy.
Unable to pay
An insolvent charge is a charge created within the two years immediately before the bankruptcy commenced and immediately after which the bankrupt was unable to pay his debts.
An insolvent gift made by a bankrupt to another person can be cancelled on the bankruptcy trustee’s initiative if the bankrupt made the gift within the two years immediately preceding the commencement of the bankruptcy.
Once Mr Jirongo’s trustee commences his or her activities, he or she will peruse Mr Jirongo’s records for the purposes of identifying any irregular transactions that may have been entered into with the intention of evading his obligations to creditors.
These transactions may then be cancelled so that the property involved can form part of the bankrupt’s estate to be used in payment of creditors.
Lichuma is an insolvency law lecturer at Riara Law School, Nairobi