Bankrupt Spouse What You Need to Know


Bankruptcy is a legal method of eliminating debt and providing a means for debt oppressed people to obtain a ‘fresh start’. Simply put bankruptcy means the elimination of the debt one owes to the creditor .

This article seeks to analyse the Law relating to bankruptcy emphasis being put on the treatment of a matrimonial home, family assets ,bankrupt’s salary and claims of relatives. It will show how this Law relating to the foregoing has given rise to or rather disorder in litigation. This has led to the conclusion that the Law is of no use or benefit as it does not clearly define what should be done in the event that these items are brought for distribution when one of the spouses is declared bankrupt.

WHO MAY BE MADE BANKRUPT?
The Law governing personal insolvency in Kenya is the Bankruptcy Act (Chapter 53) Laws of Kenya which came into force on 3rd September 1930.It must however be noted that the same has been amended over time with the most recent amendments being made in the year 2012.
Generally speaking subject to statutory conditions any individual within the jurisdiction of a bankruptcy Court owing a debt or debts , the amount of which , or the aggregate amount of which is equal to or exceeds the bankruptcy level, the payment of which may be enforced against him or her personally , maybe made bankrupt. The position however of a person having imperfect contractual capacity must be noted.
A bankruptcy petition; it should be noted can be filled by the bankrupt individual (voluntary bankruptcy) or it can be requested by the creditors (involuntary bankruptcy) in an effort to recover what they are owed .It should be noted that proceedings in bankruptcy may involve serious consequences for a debtor and before a petition can be presented, the Court will require prima-facie evidence of insolvency. This is furnished by proof that a debtor has committed acts of bankruptcy as specified in Section 3 of the Bankruptcy Act. In a majority of cases however bankruptcy is initiated by the debtor (the bankrupt individual)
Once a Petition is filed the Court forthwith makes a Receiving Order. A Receiving Order is the first of two official Orders made by a Court in bankruptcy. All actions against the debtor in respect of enforcement of claims are stayed. The procedure relating to bankruptcy proceedings is lengthy therefore in the instant article emphasis will be placed on the period right after adjudication of bankruptcy.
A debtor remains bankrupt until he or she is discharged or his bankruptcy is annulled. When an adjudication Order is made the debtor’s property passes to his trustee in bankruptcy and until a trustee is appointed the Official Receiver is to act as a Trustee. In essence the primary function of the Official Receiver is to act as a receiver and manager of the bankrupt’s estate pending the vesting of the estate in the trustee and carry out investigation into the conduct and affairs of the bankrupt with a report of such investigation to the Court as he thinks fit .

BANKRUPTCY DECLARED WHAT NEXT?
Section 2 defines ‘trustee' to mean the trustee in bankruptcy of a debtor’s estate. It should be observed that the trustee cannot assemble the debtor’s property without first finding out what there is. He or she is aided in this by the debtor’s sworn statement of affairs in which the debtor is subject to examination both at meetings of creditors and publicly before Court . It must be noted that after adjudication the debtor is under a general duty to ‘aid to the utmost of his power’ in the realization of his property.
In general the object of bankruptcy law is that all the property compromised in the bankrupt’s estate should be realized by the trustee in bankruptcy and divided among the creditors. A case in point would be that of Hollinshed vs Hazellton where the House of Lord held that ‘there is a principle of public policy… that in bankruptcy the entire property of the bankrupt, whatever kind or nature it be, whether alienable or inalienable subject to be taken in execution, legal or equitable or not so subject shall with the exception of some compassionate allowances for his maintenance, be appropriated and made available for payment of his creditors.

The Matrimonial Home

The most severe effect of the Order made is that it puts the bankrupt’s home at risk. The reason for this is that the home and any other property owned by the bankrupt vests automatically in the Official Receiver or any subsequently appointed trustee in bankruptcy on the making of a bankruptcy order. Emphasis should be placed on the fact that in the majority of cases the single most valuable asset belonging to the bankrupt are included in the bankruptcy.
If assets are jointly owned with a spouse, then the bankrupt’s portion may have to be sold and distributed to the creditors. It is important to make the trustee aware of joint assets so that each case can be viewed individually.
In instances where the matrimonial home is jointly owned by the spouses and one of them becomes bankrupt, the question as to the right of the trustee in bankruptcy to have the house sold in order to take half the proceeds into estate arises. The common view is that in Law the wife has a strong right to retain the home. There are however instances where this is not the position. A case in point would be that of Re Turner where a bankrupt husband sought an order for sale. The trustee was represented by Counsel but the husband appeared in person. Goff J thought that the trustees claim based on his statutory duty gave him a stronger claim and required his voice to be treated as one which ought to prevail in equity. Closer home in the case of reference may be made to the case of Rosanna Pluda vs Philip Moi where Mr. Moi applied to be adjudged bankrupt and his wife Ms. Pluda claimed that not to be the position since as far as she was concerned their matrimonial home in Muthaiga was enough to show that Mr. Moi was a man of means and could pay the maintenance prayed for by her.
The unavoidable effect of this process of bankruptcy is that the bankrupt is presently rendered homeless, and that his or her fate is experienced by any spouse, children and other dependant’s whom they share the home with.

Family Assets

It has long been accepted that, in divesting the bankrupt of his property for the benefit of his or her creditors, the law should refrain from stripping him or her or his family of the last vestiges of dignity and comfort as represented by their personal clothing, their essential domestic furniture and equipment and the tools or equipment which the bankrupt earns his or her living with and thus supports his or her family with . This in turn operates as an exception to the general rule that all the property of the bankrupt should be realized by the trustee in bankruptcy and divided among creditors.
In considering the property available to the bankrupt’s creditors the question that should follow is which assets are exempt. A statutory exemption is as provided for in Section 43 of the Bankruptcy Act that provides for a description of the bankrupt’s property divisible among creditors. It should be noted that the items mentioned are not exhaustive.

Bankrupt’s Salary
In principle any money which constitutes the bankrupt’s income is claimable in bankruptcy as after acquired property. A rule has therefore been adopted whereby the bankrupt is allowed to retain a proportion of his income to the extent deemed necessary to maintain his or her family in reasonable circumstances. Reference here is made to the case of Re Cohen . This however is not the case always. At this point we look at the case of Re Walter (Deceased) where ‘A’ having made a will was adjudged bankrupt, the claims remaining exceeded his estate. After the adjudication the bankrupt out of his personal earnings accumulated certain sums which he placed in a bank. The bankrupt during the period which he was accumulating these sums incurred further debts to creditors in the ordinary course of living. It was held that the death of the bankrupt made no difference as to the creditor’s rights, and that such debts or creditor’s had arisen since the adjudication, and as after the inquiry should prove to be necessaries remaining unpaid , were properly payable out of one of the accumulations left by the bankrupt at his death.
 

Claims by relatives
The trustee must distribute the assets available in accordance with the prescribed order of payment. It should be noted that a bankrupt’s debts are usually many and may be varied. The general rule is that all debts provable in bankruptcy rank equally. Claims by relatives are however not subject to this rule as can be seen in Section 41 of the Bankruptcy Act which provides for the postponement of claims by relatives which is quite unfortunate as it is clear relatives are not given any priority.
In light of the foregoing is there confusion in litigation when dealing with property available for payment of the bankrupt’s debt?
The answer to the above is most definitely in the affirmative. Controversy looms greatly in the law relating to the treatment of the bankrupt’s property. A look firstly at the matrimonial home would be a good starting point. It is to be observed that the general rule is that all the property comprised of the bankrupt’s estate should be realized by the trustee in bankruptcy and divided among creditors.
At this point reference will be made to the case of Jones vs Challenger where it was held in relation to property acquired jointly as the matrimonial home neither spouse has a right to demand sale while the purpose still exists. This, it should be noted, is now a settled law applicable to property owned jointly by joint occupants whether married or unmarried. This brings one to the issue of beneficial interest vested by the occupants. The priority battle begins here with the non-bankrupt spouse and the trustee. In other words a conflict arises between the interests of the occupants and the statutory obligation of the trustee to realize the bankrupt’s assets for the benefit of the creditors. In the case of Re Densham (a bankrupt) here a bankrupt husband was living with his wife in the matrimonial home , although there the wife’s beneficial interest in it was less than half Goff J made an order for the sale not putting into consideration the wife’s interest though less than half.
What about the interests of the children? In Re Bailey (a bankrupt) the parties herein had been divorced in 1974 and the husband became bankrupt in 1975. On application by the husband’s trustee in bankruptcy, the wife contended that the Order should be postponed until the son of the marriage had completed his full time education. The contention was rejected and sale was ordered within a short period. The question then should be how far should the interests of the children be taken in to consideration? They equally cannot be subject to the harsh procedures of bankruptcy.
Children’s interests are only to be ‘incidentally’ taken into consideration. A case in point would be Burke vs Burke where Buckley LJ held that the existence of young or dependent children did not prolong the secondary purpose but was a factor to be incidentally taken into account. Incidentally should not be the case. Case law should at the very least define what criteria is to be followed. Exceptional circumstances should be put into consideration as was held by Walton J in Re Lowrie (a bankrupt) that it is not uncommon for young children to be faced with eviction. However such circumstances only endanger natural sympathy in all who hear them thus cannot be described as exceptional circumstances. They are melancholy consequences of debt and improvidence with which every civilized society has been familiar.
Confusion is still evident in the issue of exceptional circumstances. A case in point would be that of Re Holliday (a bankrupt) where the husband as a tactical move petitioned for bankruptcy in order to avoid the transfer of property to his wife. He was it should be noted in a good position to pay of whatever debts he had. The husband fled leaving the wife in the home which was the subject matter of the application, with responsibility for all the children on her own. It was held that this was an exceptional circumstance. In my view this was a special circumstance. The effect however of a comparison of merits of a case and hardship is in its very nature difficult, because the position of the creditors on one hand and a family on the other are in themselves hard to compare.
Family assets true are exempt. They are not subject to distribution. It should however be noted that the list provided in the Bankruptcy Act ,Chapter 53 of the Laws of Kenya which is the Law governing bankruptcy in Kenya is not exhaustive. What amounts to family assets needs to be defined.
Claims by relatives are also an area of contention. Emphasis is placed on the issue postponement of their claims this in itself is unfair it appears that by virtue of being related to a bankrupt who owes relative money the debt is not given priority. The fact is the money was borrowed from the relative making him or her a creditor and the one borrowing a debtor. The issue of postponement conflicts with Section 38 (7) which states that all debts proved in bankruptcy should be paid parri passu. It would be correct to say that this provision is all on paper and not in action.
The personal earnings of the bankrupt do not pass to his trustee, but he may retain only so much of his earnings as are necessary to support himself and his family .The conflict comes in when determining what amounts to income. Any surplus income above the figure set by the trustee would in theory be claimable, were it not for the practical duties of doing so in view of the bankrupt’s capability to squander it through spending , thus rendering it unamenable to tracing. It is true the bankrupt is allowed to retain a proportion of his income to the extent deemed necessary to maintain himself and his family in reasonable circumstances. The question is what amounts to reasonable? Two cases may be distinguished here that of Re Roberts and Re Walter’s (Deceased) In the latter case Court found that the death of the bankrupt made no difference as to the creditors’ rights; and that such debts had arisen since adjudication and as after inquiry should prove to be necessaries remaining unpaid were properly payable out of the accumulations left by the bankrupt at his death. In the former case Lindley M.R in his judgment refers to what may be necessaries, and says: ‘On the other hand , the necessity is the limit of exception.’

Recommendations
Recommendations for reform of the law relating to the treatment of the matrimonial home, family assets, bankrupt’s salary and claims of relatives must go beyond merely amending and patching the Law. The Law should be aimed at rehabilitating than punishing and stigmatizing the bankrupt. This should in fact be the cardinal aim: rehabilitation of the bankrupt.

  • The bankrupt ought to be given a degree of allowance to fulfil some of the important obligations such as promoting the rights of his or her children especially the rights to food, shelter ,education among others without abdicating the debtor’s obligation to satisfy his or her creditors’ claims
  • A clear definition of what is put into consideration when looking at the matrimonial home in terms of considering it as an asset that is distributable in bankruptcy should be laid down. However, if Laws are put in place some element of equality would be achieved since the cases would not be looked at on merit but strict Law.
  • Review or reform should be considered in regard to the claims by relatives. The law regarding these claims is unfair. It equally does not encourage prompt payment of debt if the creditor is a relative. This should not be the case. The Law regarding postponement of relatives’ claims under the Bankruptcy Act (Chapter 53, Laws of Kenya) should in fact be repealed let alone reviewed.
  • The bankrupt’s salary as a whole should be made an exempt item. The issue of considering after acquired property should not occur.

Conclusion
Bankruptcy proceedings provide a vital means of debt collection being an advantage to both creditor and debtor. However, from the above one would gladly conclude that the creditor gets the biggest piece of the cake as regards recovery of the debts and leaves the debtor in most instances in a fix. If some reform could be placed in some of the areas mentioned above then the controversy in litigation would be reduced a great deal and the vast criticism in regard to the law relating to treatment of the bankrupt’s property would be a thing of the past.

 

 

Disclaimer: This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Nothing in this article is intended to guaranty, warrant, or predict the outcome of a particular case and should not be construed as such a guaranty, warranty, or prediction. The authors are not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall they be liable for any damages resulting from reliance on or use of this information. Readers should take specific advice from a qualified professional when dealing with specific situations.





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