UNIT 13: INTRODUCTION TO BANKRUPTCY

/ PERSONAL INSOLVENCY
Introduction
Insolvency is the inability of a person - an individual or a
corporation - to pay all their debts as and when they fall due.
The law that governs bankruptcy is bankruptcy Act Cap 82.
The purpose or object of the Bankruptcy Act is:
 to make provision for the administration in bankruptcy of
the estates of debtors;
 to make provision for punishment of offences committed
by debtors;
 to provide for reciprocity in bankruptcy proceedings
between Zambia and other countries;
 and to provide for matters incidental to and consequential
upon the foregoing.
Introduction
While the liquidation procedure or process applies to
companies, the equivalent procedure for individuals is
bankruptcy.
Bankruptcy like liquidation is a collective process
whereby a trustee in bankruptcy (bankruptcy’s
counterpart of the liquidator) is appointed to
administer the estate of an insolvent debtor.
Introduction
The debtor can only be made bankrupt by a
bankruptcy order of the court.
The debtor’s estate, subject to certain exceptions,
will automatically vest in the trustee, who will
maximize the assets available to pay as much
as possible to the creditors.
The law and procedure in bankruptcy is broadly
similar to that in compulsory liquidation with
necessary differences.
Introduction
While the ultimate result of a liquidation is that
the company is dissolved and cease to exist, in
bankruptcy of an individual, the debtor will
not cease to exist and instead has the benefit
of a discharge from all the bankruptcy debts
at the end of the bankruptcy.
The effect of discharge is that the slate is wiped
clean and the vast majority of discharged
bankrupts may start again with all the debts
wiped away by the bankruptcy process.
Introduction
The concept of discharge is a great privilege in that
without it the debtor would remain liable forever
on debts which frequently have reached an
unmanageable size.
The discharge from bankruptcy permits the debtor
to be given a fresh start and is in such context a
form of rehabilitation.
In addition to the benefit to the debtor of becoming
discharged from the accumulated burden of his debts,
bankruptcy is a collective procedure.
Introduction
Under the bankruptcy process, creditors are
generally treated equally.
This equality rule, known as the pari passu rule, is
subject to a number of exceptions but to some extent
prevents all the debtor’s creditors engaging in a
free-for-all rush to enforce their claims against
the debtor.
Introduction
Although bankruptcy is a privilege, it attracts a very
negative connotation in that there remains a social
stigma attached to bankruptcy.
During the period that a bankrupt remains
undischarged, a number of disabilities are
imposed on the bankrupt.
Even after discharge, a debtor’s credit history will be
severely damaged.
Introduction
Any prospective lender who undertakes a credit
search with the Zambian Credit Reference Bureau
(ZCRB) and finds a prospective borrower has
previously been adjudicated bankrupt will be
reluctant to lend the discharged bankrupt
money.
Summary Procedure of Insolvency
It must first be established whether or
not the debtor is capable of being
made bankrupt.
Consider or examine the types of debt
owed and the types of creditor owed
those debts.
Establish that the debtor is subject to
bankruptcy jurisdiction of the courts
in Zambia.
Summary Procedure of Insolvency
A petition will need to be presented to the court. The
petitioner will usually be a creditor or the debtor.
Voluntary bankruptcy is the term used to describe
the situation where the debtor petitions against
himself.
If the petitioner is a creditor, it will need to be
shown that the debtor owes a debt of at least one
hundred kwacha.
Summary Procedure of Insolvency
 Both types of petition are heard by the court. The
court may make the bankruptcy order, dismiss the
petition or, in certain circumstances, instruct an
insolvency practitioner to consider whether a
voluntary arrangement is possible and would be
a better solution than a bankrupt order.
 Once the bankruptcy order is made, the
bankruptcy is deemed to have commenced.
Summary Procedure of Insolvency
The official receiver is initially appointed as a
receiver and the manager of the estate to protect
and preserve it for the benefit of the creditors.
The official receiver may continue in office as the
trustee in bankruptcy may be appointed by the
bankrupt’s creditors.
Summary Procedure of Insolvency
The official receiver is under a duty to obtain
statement of affairs from the bankrupt and to
investigate the reasons of insolvency.
The official receiver must also establish the value of
the estate. The official receiver may apply for a
public examination of the bankrupt.
At such an examination the bankrupt is
questioned on oath or affirmation, for example,
on the events that led to the bankruptcy or the
whereabouts of certain assets.
Summary Procedure of Insolvency
If the value of the estate is sufficient, the official
receiver will call a meeting of creditors to
appoint a trustee in bankruptcy.
The creditors may also set up a creditors’
committee to represent the creditors throughout
the bankruptcy.
Once appointed the estate vests in the trustee, in
that he controls it, is responsible for it and can
sell it.
Summary Procedure of Insolvency
The trustee must realise the estate and distribute
the proceeds to the creditors according to
statutory priority rules.
Distribution is only made to creditors with
provable debts.
Once the estate has been fully administered the
bankrupt will be discharged.
Acts of bankruptcy
Before considering in detail the rules relating to
debtors’ or creditors’ petitions it is necessary first
to consider who can be made bankrupt.
Under section 3(1) A debtor commits an act of
bankruptcy in each of the following cases:
 (a) if in Zambia or elsewhere he makes a
conveyance or assignment of his property to a
trustee or trustees for the benefit of his creditors
generally;
Acts of bankruptcy
 (b) if in Zambia or elsewhere he makes a
fraudulent conveyance, gift, delivery, or transfer
of his property, or of any part thereof;
 (c) if in Zambia or elsewhere he makes any
conveyance or transfer of his property, or of any
part thereof, or creates any charge thereon,
which would under this or any other Act be void
as a fraudulent preference if he were adjudged
bankrupt;
Acts of bankruptcy
(d) if with intent to defeat or delay his creditors he
does any of the following things, namely, departs
out of Zambia, or being out of Zambia remains out
of Zambia, or departs from his dwelling-house, or
otherwise absents himself, or begins to keep
house;
(e) if execution against him has been levied by
seizure of his goods under process in an action in
any court, or in any civil proceedings in the court,
and the goods have been either sold or held by the
sheriff for twenty-one days:
Acts of bankruptcy
 (f) if he files in the court a declaration of his
inability to pay his debts or presents a
bankruptcy petition against himself;
 (g) if a creditor has obtained a final judgment or
final order against him for any amount, and,
execution thereon not having been stayed, has
served on him in Zambia, or, by leave of the
court, elsewhere, a bankruptcy notice under this
Act …
Acts of bankruptcy
 (h) if the debtor gives notice to any of his
creditors that he has suspended, or that he is
about to suspend, payment of his debts.
Debtor (s.3(2))
The Bankrupt Act defines a debtor as to include any
person, whether a Zambian citizen or not, who at the
time when any act of bankruptcy was committed by
him-
 (a) was personally present in Zambia; or
 (b) ordinarily resided or had a place of residence
in Zambia; or
Debtor (s.3(2))
 (c) was carrying on business in Zambia,
personally, or by means of an agent or manager;
or
 (d) was a member of a firm or partnership which
carried on business in Zambia;
and, for the purposes of Part IX, includes a person
against whom bankruptcy proceedings have been
instituted in a reciprocating country and who has
property in Zambia.
Who can be made bankrupt?
Under section 3(2) of Cap 82 a petition may be made
against a debtor if the debtor (whether a Zambia
citizen or not) if the debtor at the time when any
act of bankruptcy was committed by him:
 (a) was personally present in Zambia; or
 (b) ordinarily resided or had a place of residence
in Zambia; or
Who can be made bankrupt?
 (c) was carrying on business in Zambia,
personally, or by means of an agent or manager;
or
 (d) was a member of a firm or partnership which
carried on business in Zambia; or
 (e) bankruptcy proceedings have been instituted
in a reciprocating country and who has property
in Zambia.
Who can petition for debtor’s bankruptcy?
Under section 5 of the Bankruptcy Act the following
persons may petition for a debtor’s bankruptcy:
 (a) the debtor himself or herself;

 (b)one of the debtor’s creditors or more than one

of them petitioning jointly.
Who can petition for debtor’s
bankruptcy?
Section 5 of Cap 82 provides that subject to the
conditions hereinafter specified, if a debtor commits
an act of bankruptcy the court may, on a
bankruptcy petition being presented either by a
creditor or by the debtor, make an order, in this
Act called a receiving order, for the protection of
the estate.
Bankruptcy Notices
Under section 4 of Cap 82 bankruptcy notice under
this Act shall be in the prescribed form, and shall
require the debtor to pay the judgment debt or sum
ordered to be paid in accordance with the terms of
the judgment or order, or to secure or compound for
it to the satisfaction of the creditor or the court, and
shall state the consequences of non-compliance with
the notice, and shall be served in the prescribed
manner.
END OF LECTURE
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