DUTIES OF THE BANKRUPT

RIARA LAW SCHOOL

 Duties of the Bankrupt

• The bankrupt is expected to assist the trustee in the realization of property

and distribution to the creditors.
• The bankrupt has to notify the trustee of any property that was acquired or
passed to the bankrupt before discharge and that is divisible among the
creditors.
• The bankrupt has a duty to deliver any property that is within his control
and that is divisible among the creditors.
• The bankrupt’s interest in a dwelling house occupied by the bankrupt or his
spouse may be subjected to a charge for the benefit of the bankrupt’s estate if
for whatever reason the trustee is unable to realize the property.
• Look at Bankruptcy Cause No. 4 Of 2003 – Re Leonard Onyancha
Ochengo
• Also look at Bankruptcy Cause No 4 Of 1989 In Re Al-moody (A Debtor)
• As soon as practicable after being adjudged bankrupt the bankrupt shall deliver any relevant
documents (accounting records and other documents relating to his estate) in his possession
to the trustee.
• The bankrupt has to give the trustee a complete and accurate list of his property, any debtors
and creditors. He also has to give details of his income and expenditure since the bankruptcy
commenced.
• If any of the information initially given by the bankrupt changes he has to notify the trustee
within 7 days.
• Section 153 provides that a court may issue a search warrant if there is reason to believe that
any relevant property is concealed.
• The bankrupt may also be required to prepare a financial statement that shows his financial
position (usually within 21 days or such extended period as allowed) or may be required to
provide the trustee with information that will enable him to prepare the financial statement.
This financial statement should show details of any trade undertaken by the bankrupt as well
as profits and losses for the three years preceding the commencement of the bankruptcy.
 Charge on Bankrupt’s home

• Section 143 of the Act provides that where a bankrupt’s estate

includes an interest in a dwelling house occupied by the
bankrupt or his spouse or former spouse and the trustee is
unable for any reason to realize that property, he may apply to
the court for an order imposing a charge on the property for the
benefit of the estate.
• The amount of the charge to be imposed is the total of the
liabilities of the bankrupt together with interest and the costs of
the bankruptcy less the value of any other assets which the
trustee has realized. Any surplus equity would vest in the
bankrupt and not in the trustee.
• Any person interested in the property can apply for the order to
be discharged or varied.
 Restrictions during Bankruptcy
• The bankrupt may be required to pay an amount or periodic amounts
during the bankruptcy as a contribution towards payment of the bankrupt’s
debts. Reasonable allowance should be made for the maintenance of the
bankrupt and any dependents.
• An undischarged bankrupt shall not, without the consent of the court or the
trustee:
i. enter into, carry on, or take part in the management or control of any
business;
ii. be employed by a relative of the bankrupt or
iii.be employed by a company, trust, trustee, or incorporated body that is
owned, managed, or controlled by a relative of the bankrupt.
• The bankruptcy trustee may require the bankrupt or his relatives to vacate
any land or building that is part of the property vested in the trustee.
• Once the bankruptcy commences the bankrupt is not entitled to recover
property that is part of the bankrupt’s estate or give a release or discharge
in relation to that property.
 The Bank of the bankrupt

• As soon as possible after becoming aware that their customer has

been declared bankrupt the bank will be expected to notify the
trustee of any accounts that the customer holds with the bank and
not pay any money from the account.
• However, a bank may proceed to make payment if they have
received authorization to do so either from the court or the
trustee. Additionally, if the bank notifies the trustee of the
account but fail to receive instructions within a month they are
free to make payments.
• The Official Receiver has the power to require a bank to compare
the names of its customers with the names of undischarged
bankrupts and provide written results of the search within 7 days.
The bankrupt is allowed to retain the following

a)the bankrupt’s necessary tools of trade subject to the figure fixed by the
trustee
b)necessary household furniture and personal effects (including clothing) for the
bankrupt and the bankrupt’s relatives and dependents subject to the figure fixed
by the trustee and
c)a motor vehicle (subject to a limit of Sh. 1 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.
•If the bankrupt has died any relative or dependents of the bankrupt may
exercise the right to retain assets for the benefit of the bankrupt’s relatives and
dependents.
•The bankruptcy trustee may make an allowance out of the property for the
support of the bankrupt and his relatives.
•The bankrupt may be allowed to retain Sh. 100,000 from money in his
possession or in a bank account when the bankruptcy commenced for the
immediate maintenance of the bankrupt and his relatives
 Matrimonial Property
• What happens when the bankrupt individual is married and jointly
owns property with his spouse?
• Section 6 of the Matrimonial Property Act 2013 identifies examples
of matrimonial property e.g. the matrimonial home; household
goods and effects in the matrimonial home, any other immovable
and movable property jointly owned and acquired during the
subsistence of the marriage.
• As provided under section 12 of the Matrimonial Property Act it is
interesting to note that the matrimonial home can form part of the
bankrupt’s estate.
• Section 12(4) specifically provides that a spouse shall not be evicted
from the matrimonial home by any person except on the sale of any
estate or interest in the matrimonial home in execution of a decree;
or by a trustee in bankruptcy;
 Re Citro (1991)

• In 1985 Domenico Citro and his brother Carmine were declared bankrupt.
Their only substantial assets were the beneficial shares they had in their
matrimonial homes. One of the brothers was judicially separated from his
wife and the other was living with his family. Their debts exceeded the value
of their interests. The bankruptcy trustee applied for an order for sale of the
matrimonial homes and the trial court agreed but ordered that the sale be
postponed until the youngest children in both families had reached the age of
16 on the basis that there was inadequate equity in the wives' half-share to
allow them to rehouse themselves and the children. On appeal by the trustee
Lord Justice Nourse said the usual position would be for the rights of the
creditors to prevail; only in exceptional circumstances would the rights of the
wife prevail. Homelessness for these wives and children was not an
'exceptional circumstance', but rather part of the 'melancholy consequences
of debt and improvidence with which every civilised society has been familiar”.
• Subsequent case law has applied Re Citro and it
would appear that the only situation where the
court may find exceptional circumstances is that
involving serious health problems. For example, in
Claughton v. Charalambous the bankrupt’s
spouse was suffering from chronic renal failure
and osteoarthritis and had a reduced life
expectancy. The court held suspended the order
for sale for so long as the wife could live in the
house.
 Public examinations during bankruptcy

• The Court or the bankruptcy trustee may publicly

examine under oath the bankrupt, the bankrupt’s
spouse, persons suspected to be in possession of the
bankrupt’s property or documents, the bankrupt’s
debtors, or any person believed to have information
regarding the bankrupt or his affairs.
• It is a criminal offense for any person required to be
examined to fail to attend the examination, or to deliver
documents or to answer any questions asked. The
penalty for this may be a fine or imprisonment or both.
 Status of the bankrupt’s contracts
• If a bankrupt had entered into any contracts before he was adjudged
bankrupt the trustee may continue with the contracts or disclaim them as
onerous property.
• In cases where the other party to the contract purports to terminate it in
consequence of the bankruptcy the bankruptcy trustee may recover an
amount of money from the other party. The maximum amount recoverable
is to be computed as follows:
A=B–C
Where A = The amount to be recovered
B = The amount payable to the bankrupt under the contract
C = The total of the amount paid to the bankrupt, the cost to
complete the contract and a reasonable amount as a
penalty or delay in completing the contract.
• If the bankrupt is jointly liable under a contract with another person, that
other person may sue and be sued on the contract without the bankrupt
being joined as a party to the proceeding.
 Irregular transactions

• The bankruptcy trustee has the legal authority to cancel any irregular
transactions entered into by the bankrupt and recover property or money
from a party to an irregular transaction with the bankrupt.
• Examples of irregular transactions are given under section 194(1) of the
Act.
• 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; and enables
a creditor to receive more towards satisfaction of a debt than he would
receive in the bankruptcy.
• 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.
Procedure for cancelling an irregular transaction

• The trustee has to serve a notice to the court as well as to the

other party to the transaction. The notice should be in writing, it
should state the irregular transaction to be cancelled and give
other details as prescribed by section 208 of the Act. If the other
party does not object to the notice within 21 days the irregular
transaction will be cancelled automatically.
• The court may refuse to cancel an irregular transaction if the
other party acted in good faith, a reasonable person in the same
position would not have suspected that the bankrupt was
insolvent, the person gave value for the property or interest in
question.
 Creditor’s claims

• A creditor’s claim is a document that a creditor submits to the bankruptcy

trustee for the purpose of proving the debt. A debt is proved when it is
allowed by the bankruptcy trustee. This must be a debt that arose before the
bankruptcy commenced or after the bankruptcy commenced but relating to
an obligation that arose before bankruptcy.
• The bankruptcy trustee will thereafter examine the claims for the purpose
of determining whether to allow the claim wholly, partly, reject the claim or
require additional information.
• Within 21 days of receiving a notice of rejection the creditor can apply to
the court to quash the trustee’s decision.
• A secured creditor has the following options; to realize the property by
having it sold to have the property valued and prove in the bankruptcy as
an unsecured creditor for the balance due and to surrender the charge to
the bankruptcy trustee for the general benefit of the creditors and prove in
the bankruptcy as an unsecured creditor for the whole debt.
 The Rule against Double Proof
• This rule prevents more than one proof being submitted in respect of the same
debt.
• The most common situation of potential double proof relates to contracts of
guarantee.
• Sureties or guarantors of debts may be called upon to pay the principal
creditor of the insolvent. If both the principal creditor and the guarantor were
later allowed to claim the same debt may be paid twice.
• In Re Glen Express Ltd (2000) the defendant was a director of a company
which had gone under liquidation. The director owed the company £100,000
on a director’s loan account. He had also acted as a guarantor to the
company’s bank for £170,000. the liquidator of the company sued the director
for recovery of the loan but the director argued that his guarantee should be
offset against his liability to repay the loan. The Court held that the liquidator
was entitled to rely on the rule against double proof. Since the director had not
yet made payment to the bank in consequence of the guarantee the liquidator
could recover the £100,000.