Bankruptcy was governed by the Bankruptcy Act chapter 53 of laws of Kenya (formerly the English Bankruptcy Act 1930) while the liquidation of companies was governed by the Companies Act chapter 486 laws of Kenya (formerly the English Companies Act of 1948). The Acts largely reflected the English position of the time.

Insolvency of Natural Persons

Creditors Application

Previously a creditor could only make a bankruptcy petition id the debtor resides in Kenya. However, the new Act has widened the scope and provides that an application can also be brought if the debtor is personally present at the date of application or had ordinarily resided or carried on business within three years of the date of application.

Bankruptcy Trustee can Cancel Charges

A bankruptcy trustee can on its own initiative cancel a charge over any property of a bankrupt if the charge was created within the two(2) years immediately before the bankruptcy commenced and immediately after the charge was given, the bankrupt was unable to pay the bankrupt’s due debts.

However, a charge may not be cancelled if it either secures money actually advanced or paid, if it secures the actual price or value of property sold or transferred or if any other valuable consideration is given in good faith by the secured creditor.

Secured Creditor’s Options in the Event of Bankruptcy

The Act provides three options available to secured creditors in the event of bankruptcy. The creditor can:-
a) realize the charge;
b) surrender the charge to the bankruptcy trustee for the benefit of creditors; or
c) have the property valued and prove for the balance due after deducting the amount of the valuation

The Insolvency Act now provides that the bankruptcy trustee will require the secured creditor who holds a charge over a bankrupt’s property to choose any of the options within thirty(30) days after receipt of the notice.

It is important to note that failure to comply with the notice with respect to selecting an option will be deemed to be a surrender of the charge to the bankruptcy trustee for the general benefit of the creditors. It is therefore necessary that a lending institution exercise its option to realise its security within the thirty day notice.

Claim for Interest by a Creditor

A creditor may claim interest on the debt up to the date on which the bankruptcy commences. Post-bankruptcy, the bankruptcy trustee can only pay interest on the allowed creditor’s claims, if surplus assets remain after the bankruptcy trustee has paid the claims.

Power of the Court to Order Disposal of Charged Property

The Insolvency Act provides that the bankruptcy trustee may make an application to Court; the Court may make an order enabling the bankruptcy trustee to dispose of the property as if it were not subject to the security, but only if the Court is satisfied that the disposal of the property would be likely to provide a better overall outcome for the creditors of the bankrupt.

The proceeds of the sale will go towards discharging the amounts secured by the security, and any additional money, required to be added to the net proceeds. It can therefore be deduced that a secured creditor will now rank in priority in receiving the proceeds of the sale over the trustee’s costs.

Where a Secured Creditor realises the Security

Where a secured creditor realises the security, they are required to account to the bankruptcy trustee for any surplus remaining after payment of the debt, interest and any proper payments to the holder of any other charge over the property.

Voluntary Arrangement – An Alternative to Bankruptcy

The Insolvency Act allows a debtor to enter into an arrangement with the creditors as an alternative to bankruptcy. On taking effect, the approved proposal binds every person including a secured creditor and a preferential creditor.


The new insolvency law gives priority to revival of distressed persons rather than the previous regime that aimed at auctioning or liquidating them. It provides for rescheduling of debt to lengthen the repayment period instead of commencing bankruptcy proceedings in court.

The legislation effectively cuts the power of creditors to dictate the terms of a settlement with banks largely affected as they have been the main creditors in bankruptcy transactions. However, to secured creditors’ advantage the Act provides for alternative procedures that facilitate the management of affairs for the benefit of both the bankrupt person and the secured creditors.

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