Jomo Kenyatta University of

Agriculture & Technology, School of

Law
Insolvency Law, Class 3

Alternatives to Bankruptcy

Alternatives to Bankruptcy: Scope

Introduction
Individual Voluntary Arrangements (IVAs)
No Asset Procedure
Summary instalment order

1. Introduction
It has been shown that bankruptcy proceedings may be
commenced when a debtor is unable to pay his debts.
However this does not necessarily mean that institution of
bankruptcy proceedings is the only option.
Other options available for and/or against an insolvent
person include:
- The Individual Voluntary Arrangements
- The No Asset Procedure
- The Summary Instalment Order

2. Individual Voluntary
Arrangements

Individual Voluntary Arrangements

There are two kinds of arrangements under IVAs
Composition of debts: the debtor proposes to pay part of the debt owed to the
creditors and this makes a final settlement in regards to debts owed, if approved by
creditors in the creditors meeting.
Scheme of arrangement: the debtor gives to the creditors his proposal for payment
of their debts in full. This also requires approval by the creditors before it takes effect.
The debtor must designate a Supervisor in the IVA.
Court is involved
Application for approval of an IVA proposal may involve an application for interim
order pending approval of the IVA.
Alternatively, it may just be an application for approval of an IVA without an
application for interim order.

Procedure
Interim Order
A debtor intending to make a proposal for IVA may apply for interim order from
the court.
The purpose of this application is to prevent creditors from harassing the debtor.
The application may be made by:

If the debtor is an undischarged bankrupt, the application may be made by the:

The debtor himself

The bankruptcy trustee, or
The official receiver

In any other case, by the debtor

An undischarged bankrupt must give notice of his proposal to the official receiver
and bankruptcy trustee (if any) before applying for an interim order
Once granted, the interim order lasts 14 days

Procedurecontinued
Conditions for granting an interim order
Court must be satisfied that the debtor intends to make a proposal
The debtor is an undischarged bankrupt or qualified to make an
application for bankruptcy
No previous application for interim order within 12 months
immediately preceding the intended application
The proposed to supervisor under the proposal is willing to act as
a supervisor
Court must be satisfied that the interim order will facilitate
consideration and implementation of the debtors proposal

Procedurecontinued
Effects of an Interim Order
Right of forfeiture by the debtors landlordonly with courts approval
Court (high court) may prohibit distress on the debtors property, or its
sale
Staying of other legal processescourt (high court) may do this
A court in which a proceeding against a debtor is pending may
stay the same on being satisfied that an application for interim order has been
filed in the high court, or
Allow the suit or proceedings to continue on appropriate terms

The proposed supervisor in the IVA becomes the Provisional

Supervisor of the IVA

Procedure
Where the debtor has not been adjudged bankrupt by
the court;
A bankruptcy petition may not be made or proceeded with
against the debtor
A debtors landlord has the right of forfeiture of the tenancy by
peaceable entry with courts approval

Any other legal proceeding to begin or continue with

courts approval

Procedure
Role of the Provisional Supervisor
He is required to submit to court a report stating
The prospects of approval of the IVA by the creditors and its implementation
Whether a creditors meeting should be convened to consider the proposal
If the supervisor proposes a meeting, the date, place and time of the meeting

Interim order may be discharged if:

the debtor fails to supply the supervisor with proposal document; and
the debtor fails to supply financial statement containing details of
creditors, debts and the debtors assets and other information as may
be required

Procedure
Application for IVA approval without an interim
order
Application may be made by an undischarged bankrupt
or a debtor qualified to make a bankruptcy petition.
Applicant names an intended supervisor in the proposal.
The supervisor then makes a report to court as to
whether:
The debtors IVA proposal has chances of being approved by
creditors
There is need to call for creditors meeting

Creditors meeting
Convened by the provisional supervisor on the date, time and place
proposed by him in his report to the court, unless the court directs
otherwise.
Attendees: the supervisor to summon every creditor of the debtor
whose claim and address he is aware of.
At the meeting, a chairperson is elected who then divides the meeting
into three groups: secured, preferential and unsecured creditors.
The creditors meeting may approve the IVA proposal as it is or with
modifications. But the debtor must consent to the modifications
The modifications may involve the replacement of the supervisor
The meeting may also reject the IVA proposal.

Right to challenge the decision of

the creditors meeting
Application may be made to court to challenge the decision of the
creditors meeting where:
The decision unfairly affects the interests of a creditor
A material irregularity occurred at or in relation to the meeting

Application may be made by:

The debtor
A person entitled to vote at the creditors meeting
A person who would been entitled to vote had he received notice of the
meeting
Provisional supervisor or the supervisor of the IVA
The bankruptcy trustee or official receiver, where the debtor is a bankrupt

Effect of approval of an IVA proposal

An IVA proposal takes effect a day after its approval by the court pursuant to
an application for approval by the debtor or a creditor who attended the
creditors meeting, or was entitled to attend the meeting.
It binds every person who was entitled to vote at the meeting, absence
notwithstanding
It also binds a person who would have been entitled to vote in the meeting
had that person received a notice of the meeting
Provisional supervisor becomes the supervisor unless replaced by the
creditors
Debtor liable to pay outstanding debt at the end of the IVA: applies to
debtors who never received notice of creditors meeting
A bankrupt may make an application to be discharged from bankruptcy

3. Summary Instalment Order

Summary Instalment order

Definition: It is an order made the official receiver
directing the debtor to pay his debts:
In instalments or any other way
In full or to the extent that the official receiver considers
practicable

Application may be made by:

The debtor; or
A creditor with the debtors consent

Summary Instalment order

Contents of the application:

Should state that the debtor proposes to pay the debt in full
State the proposed weekly or other instalment the debtor intends to pay
State the name and address of the proposed supervisor, including consent of the said proposed
supervisor, or give reasons where he thinks there is no need of a supervisor
Debtors full name and address
Details of property
Names and address of each creditor
Amount and nature of each debt
State whether there are any secured debts
Whether any debts are guaranteed b any person
Amount of the debtors earnings
Name and address of the debtors employer
Any other matter prescribed by the insolvency regulations

The application must be in the form prescribed by the regulations

Summary Instalment Order

continued
The official receiver may make a summary instalment order, plus the
following additional orders:
An order regrading the debtors future earnings or income
Order regrading the disposal of goods that the debtor owns or possesses
An order giving the supervisor power to order the debtors employer to pay all or
part of the debtors earnings to the supervisor
An order giving the supervisor the power to supervise allocation of reasonable living
expenses of the debtor and his relatives, out of the debtors earning or income

Instalment order may be spread for a period not exceeding 3 years, or if

circumstances justify, for a period not exceeding 5 years.
Varying/Discharge of the order: may be done by the official receiver
upon application by debtor, a creditor or supervisor.

Summary Instalment Order

continued
Proceedings Against the Debtor: may not start or continue
while a summary instalment order is in force, unless official
receiver allows them to continue under some conditions
Courts wherein proceedings against the debtor are pending will
stay the same upon receiving evidence of the order. But court
may award costs.
Register: official receiver to keep a public register of people who
are currently under summary instalment order.
Creditors after the order: if they prove their claim to the
supervisor, they are entitled to elect to be considered in the
administration of the estate of the debtor.

Summary Instalment Order

continued
Consequences of non-payment by the debtor:
Stayed proceedings may begin or continue
Period of non-payment to be added to limitation period

Offences:
Jointly or alone obtaining a credit of Kshs 100,000 or more
Obtaining credit of Kshs 100,000 or more for another person, thus incurring
liability
Enters into purchase by credit for Kshs 100,000 or more

Defence: person providing the credit was informed that the debtor is
subject to a summary instalment order.
Penalty: fine not exceeding Kshs 1 million or jail term not exceeding
1 year or both

4. No-asset Procedure

No-asset procedure
Meant to protect debtors who do not have realizable assets
Qualifications to be admitted:
The debtor:

has no realizable assets

The debtor has not been previously admitted to no-asset procedure
Not previously been adjudged bankrupt
Has debts not less than Kshs 100,000 and not more than 4 million
The debtor has no means of repayment

Application must be accompanied by the debtors statement on his financial

position
The application is made to the official receiver, who then sends a summary
of the debtors assets and liabilities to the known creditors of the debtor

No-asset procedurecontinued
Official receiver may require further assistance, document
information from the debtor to assist him make a determination

and

Pending application, a debtor is prohibited from obtaining credit

exceeding Kshs 10,000 unless he informs the credit giver of the pending
application
Contravention attracts fine not exceeding Kshs 500,000 or 6 months jail term or
both.

Admission: debtor is admitted to no-asset procedure when the official

receiver sends him a notice in a prescribed form.
Upon admitting a debtor to no-asset procedure, the official receiver:
Notifies each debtor he is aware of
Publishes the notice in a publication

No-asset procedurecontinued
Effects of admission to no-asset procedure
Creditors barred from beginning or continued with legal
proceedings for claims against the debtor:
that existed as at the time of the application by the debtor
That would be provable in the debtors bankruptcy if the debtor were
to be adjudged bankrupt

Exceptions
Amounts payable under a court order for matrimonial claims
Amounts payable under the Children Act
Outstanding loan to secure education for child or step-child of the
debtor

No-asset procedurecontinued
Change of circumstances:
the creditor to notify the official receiver concerning positive
changes that would enable him to pay his creditors.

Effects of no-asset procedure:

Debtor cannot borrow more than Kshs 100,000 unless he
notifies the credit giver
Breach is an offence, attracting fine not exceeding Kshs 1
million or jail term not exceeding 12 months or both

No-asset procedurecontinued
Termination of the no-asset procedure:

Where the debtor applies for bankruptcy

Where a creditor applies for a debtors bankruptcy
Where the debtor was wrongly admitted to the procedure (e.g due to assets
concealment) or he misled the official receiver
Where the debtors financial position has improved in a way that enables him to pay
his debts

The debtors participation in the no-asset procedure terminated by sending

of notice by the official receiver to the last known address
Termination takes effect as soon as the notice is sent, whether or not the
debtor receives it.
Official receiver to send notice of termination to each creditor of the debtor
known to him.

No-asset procedurecontinued
Effects of termination
The unenforceable debts become enforceable, including any
penalties and interests
The official receiver may apply to the high court for
preservation of the debtors assets pending application for
bankruptcy. This happens where no-asset procedure was
terminated as a result of asset concealment or where the
debtor misled the official receiver.

No-asset procedurecontinued
Duration of No-asset Procedure and Discarge:
Automatically lapses at the end of 12 months
However, the official receiver may defer the period for days not exceeding 35
days
deferral is meant to give the official receiver time to consider whether the
debtors entry into the procedure should be terminated
Deferral notice ought to be sent to the last known address of the debtor. It takes
effect whether or not received
Deferral notice to state the new date when the no-asset procedure will
automatically lapse
Known creditors also to be served with the notice after the creditor is served
Deferral notice may be revoked

No-asset Procedurecontinued
Effects of Discharge:
Debtors debts are cancelled
Debtor not liable to pay any debts, including any penalties and
interests that may have accrued
However, persons who are business partners, co-trustees and
persons jointly bound with the debtor in a contract do not
enjoy this immunity

Exceptions:
Any debt incurred by fraud or fraudulent breach of trust
Any debt to which the debtor obtained forbearance by fraud
These debts become payable upon discharge from no-asset
procedure