In re James Maina Kabatha (Debtor/Applicant) [2020] KEHC 2685 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA

AT NAKURU

INSOLVENCY CAUSE NO. 4 OF 2019

IN THE MATTER OF JAMES MAINA KABATHA (DEBTOR/APPLICANT)

RULING

1. The twin goals of consumer or individual bankruptcy law are to protect creditors and ensure optimal payment to them where possible; and the provision of shelter and a "fresh start" to individual debtors overburdened by debt. There is no doubt that these twin goals run through the Insolvency Act, 2015 and the Insolvency Regulations, 2016.

2. The US Supreme Court explained the fundamental goal of bankruptcy law in Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934) thus:

[Bankruptcy law] gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.

3. The “fresh start” goal is accomplished through the bankruptcy discharge, which usually releases the debtor from personal liability from certain debts and prevents creditors from taking any action against the debtor to collect those debts.

4. Consequently, bankruptcy protection being an extraordinary relief, one of the corollaries to the these seemingly conflictual twin goals of bankruptcy law – the protection of creditors and the provision of fresh start for the honest but unfortunate debtor -- is that an individual seeking bankruptcy protection is required to scrupulously demonstrate that he is acting in good faith and disclose all his financial information.

5. It is only upon meeting this double threshold – demonstration of good faith and full disclosure of all financial information – that a Petitioner can become entitled to a bankruptcy order. The architecture and structure of the Insolvency Act and Insolvency Regulations, 2018 reinforce these double threshold for individual Petitioners.

6. Section 32(2)(a) of the Insolvency Act provides that:

The Court may decline to deal with such an application [to be declared bankrupt] if it is not accompanied by a statement of the debtor's financial position containing –

(a) such particulars of the debtor's creditors and of the debtor's debts and other liabilities and assets as may be prescribed by the insolvency regulations.

7. On the other hand, Regulation18(3) of the Insolvency Regulations, 2016 lists down at least seventeen different pieces of detailed information the debtor is required to file in his Statement of financial position. The purpose of this detailed information is to enable the creditors and the Court to ascertain the bona fides of the Petition for bankruptcy and ensure that bankruptcy proceedings are not being by the debtor to game the system and evade paying his debts in circumstances in which he can pay.

8. It is, therefore, imperative, as one of Debtor’s creditors herein, Stanbic Bank Kenya Limited (“Stanbic”), argues, that the debtor scrupulously complies with the informational requirements of the Insolvency Act and Insolvency Regulations before he can benefit from a bankruptcy order. It is only by such scrupulous adherence to the statutory requirements that the Court can be in an informed position to satisfy itself that the bankruptcy Petition has been filed in good faith by an unfortunate debtor labouring under unduly burdensome debts.

9. In the present case, as Stanbic points out, the Debtor’s Statement of Financial Position lacks crucial details required by the Regulations. In particular, the following details are missing:

a. an itemised statement of the debtor’s expenses;

b. a statement of the debtor’s current assets, including the description, value, and location of those assets;

c. a statement of all financial transactions by the debtor during the previous three years

10. In addition, as per Regulation 18(4), in addition to publication of a notice in a newspaper of regional publication as required under section 32(4) of the Insolvency Act, the debtor is also required to arrange for publication of his Statement of Financial Position in the Kenya Gazette. This has not happened here.