Bankrupt Spouse What You Need to Know

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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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