Abstract

Keywords

Kenya; bankruptcy; insolvency law; alternatives to bankruptcy; alternatives to sequestration, debt review, administration orders, debt intervention.

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1 Introduction

A problem faced by over-indebted individual debtors in South Africa is not that there are no alternatives to the sequestration proceedings, but rather that the available alternatives do not provide for a discharge of debt, which is one of the objectives the debtor seeks to achieve. The World Bank Report mentions that one of the principal purposes of an insolvency system for natural persons is to re-establish the debtor's economic capability through a discharge of debts.1 In South Africa, an insolvent is automatically rehabilitated and discharged from debts after the expiry of a period of 10 years from the date of sequestration.2 As the discharge of debts in South Africa occurs only after a fairly long period of time, there is a dire need for alternative legislative interventions that would also allow debtors in different financial positions to obtain a discharge of debts. To achieve this goal many countries have developed alternatives to bankruptcy,3 which either reduce the period of bankruptcy4 or provide a discharge of debt without experiencing all the limiting consequences of bankruptcy.5 In Kenya the

alternatives to the bankruptcy provisions are contained in section 14 of the Kenyan Insolvency Act.6 The new Act came into force in 2015 and it repealed the old Bankruptcy Act7 and the old Companies Act.8

The legislative mechanisms available to over-indebted debtors in South Africa are:9 sequestration in terms of the Insolvency Act; administration orders provided for in section 74 of the Magistrates' Courts Act;10 and the debt review process provided for in terms of the National Credit Act.11 Administration orders and debt review have been classified as true debt-relief mechanisms, while sequestration, accurately speaking, is not intended to be a debt-relief mechanism available to over-indebted individual debtors, although it has the same end result and serves the same purpose.12 The Insolvency Act provides for a legislative process by which the assets of the debtor are distributed amongst his creditors. One of the consequences of a debtor's estate’s being sequestrated is that it provides for a discharge of the debtor's debts. In contrast, debt review and administration orders are more focussed on bringing relief to the debtor regarding his debts than on providing him with a discharge of his debts.

Although the Draft National Credit Amendment Bill will not be discussed in detail in this article, it is important to mention that it introduces debt intervention in clause 14.13 The debt intervention in clause 14 extinguishes part or all of the obligations for a certain class of debtors.14 Certain debtors may also apply for rehabilitation.15 However the debt intervention will be applicable only to debts of not more than R50 000 and which arose as a result of credit agreements.

This article investigates whether the current alternatives to the sequestration process allow debtors in different financial positions to obtain

a formal discharge of their debts. In order to achieve this, I will consider the current alternatives to the sequestration process available for natural person debtors in South Africa, namely administration orders and debt review. There is no intention to discuss these alternative debt relief mechanisms in any specific detail. A legal comparative investigation is done with Kenyan law, with the aim of making recommendations for law reform in South Africa regarding alternatives to sequestration that will allow debtors in different financial positions to obtain a discharge of debts in South Africa.

The inclusion of Kenyan law was based on my desire to choose a country with a mixed legal system similar to that of South Africa and a country that shares similar legal origins to South Africa, which has already reformed its insolvency legislation. Kenya has a common law background with an English influence, its insolvency legislation borrowed extensively from the UK's Insolvency Act, and its insolvency law was consolidated into a single Act in 2015. Kenya' newly enacted Insolvency Act contains a wide range of alternatives to bankruptcy, which at face value appear to achieve the purpose of legislative interventions that allow debtors in different financial positions to obtain a discharge.

2 South African sequestration process

It is important to mention that sequestration may not be the inevitable result for every over-indebted debtor who becomes insolvent. A sequestration order in South Africa in terms of the Insolvency Act may either be obtained by the debtor’s voluntarily surrendering his insolvent estate or a creditor of the debtor’s applying for the sequestration of the debtor's insolvent estate. In either case, a sequestration order in South Africa will not be granted unless it is shown that the sequestration will be to the advantage of the creditors of the debtor.16 This requirement has shown to be the most difficult to prove, more so in voluntary surrender applications.17 When applying for a voluntary surrender of his estate, a debtor has to show that he has enough assets that can be realised to pay for the costs of sequestration and, most importantly, that the sequestration will be to the benefit of creditors (eg, all the creditors will receive a dividend).18 In contrast, for the compulsory sequestration of a debtor's estate brought by a creditor of a debtor, the

creditor needs to prove only that there is reason to believe that it will be to the advantage of the debtor's creditors if the debtor's estate is sequestrated.19

As indicated, one of the consequences of a debtor's estate’s being sequestrated is that it provides for a discharge of the debts upon rehabilitation.20 The discharge can happen automatically after 10 years or earlier on application by the insolvent debtor.21 As a result, over-indebted and desperate debtors have in the past used somewhat fraudulent means to access the sequestration process22 and to eventually obtain a discharge of their debts upon rehabilitation.23

The advantage requirement of the sequestration process prevents those debtors who want to access the sequestration process only to obtain a discharge from their debts.24 However, because the discharge of debts in South Africa occurs only after a fairly long period of time, there is a dire need for alternative legislative interventions that would also allow debtors in different financial positions to obtain a discharge of their debts.

3 South African debt-relief measures outside of the sequestration process

Outside the sequestration process, if creditors have not commenced the individual debt collection process to recover their debts,25 over-indebted debtors may make an application to a debt counsellor to be declared over-

indebted in terms of the debt review procedure in section 86 of the NCA26 or they may apply for an administration order in terms of section 74 of the MCA. The debt review procedure is designed to assist over-indebted debtors by re-arranging their financial obligations under a credit agreement, with the objective of eventually settling the debt.27 Administration orders too are aimed at assisting over-indebted debtors by re-arranging their financial obligations, with the objective that the debtors' debt will ultimately be settled in full.28

Although debt review in terms of the NCA has no monetary limitation on the total outstanding debt, it applies only to debts that arose from credit agreements as defined by the NCA.29 A consumer who wishes to commence the debt review process must pay amongst other costs an application fee,30 a rejection fee if the application is rejected,31 and a restructuring fee less than or equal to the first instalment of the debt re-arrangement plan.32 Once the debt review process is complete, a debt counsellor may recommend a magistrates' court order re-arranging the debtor's obligations.33 A debt review order will be granted only if it is believed that the debtor's financial affairs can be successfully re-arranged (eg, where the debtor receives a regular income or has assets to realise).34 If the court grants the order, the debtor will generally make monthly payments to a payment distribution agent35 that will distribute the amount among the credit providers. Debt counselling does not extinguish a credit provider's claim against a debtor but merely delays its enforcement36 and regulates the way and extent of the debtor's payments to creditors.37 During debt counselling

a debtor is prohibited from obtaining any new credit, except as provided for in the NCA.38 An application for debt review does not constitute an act of insolvency in terms of the Insolvency Act,39 but it also does not per se preclude an application for sequestration.40

A consumer whose debts have been rearranged can be issued with a clearance certificate which will end his debt review but will not discharge his debts.41 A debtor can therefore be issued with a clearance certificate even if all his obligations under all the credit agreement that were subject to the debt re-arrangement have not been satisfied.42 This is in contrast to an administration order, where the debtor could remain under an administration order for ever. Debt review can also be terminated in terms of section 86(10) of the NCA. In such an instance the debtor will no longer be under debt review but his debts will not be discharged and he will have to continue paying as per the original credit agreement or as per the terms of the set aside debt review order.

The administration procedure is available to debtors whose debts do not exceed R50 000.43 Administration orders are granted by magistrates' courts to assist debtors in proceedings brought by those debtors who are not able to meet their financial obligations.44 Where a debtor has applied successfully for an administration order, an administrator is appointed to take control and manage the payment of debts due to creditors until all the listed creditors and administration costs are paid in full.45 The order usually requires the debtor to make regular payments to the administrator, who will, once all necessary expenses and determined remuneration, as per the tariff,

have been deducted, pay the creditors from the balance.46 A debtor who wants to apply for an administration order must have a steady income.47 Debts that are payable by means of future instalments due in terms of an enforceable and existing contract,48 for example a mortgage agreement, are excluded from the administration order.49

An administration order, like debt review, does not prevent the sequestration of the debtor's estate.50 The costs of the application for administration may be recovered from the first amounts received by the administrator from the debtor.51 The expenses and remuneration deductible by the administrator may usually not exceed 12.5% of the amount received from the debtor.52 As with debt review, the administration costs and administrator's fees unfortunately place an additional burden on a debtor's income, leaving less money available to distribute among the debtor's creditors.53

An administration order terminates only when the costs of the administration and all the listed creditors of the debtor have been paid in full.54 When the costs of the administration and all the creditors recorded in the administration order have been fully paid, the administrator is obliged to lodge a certificate to that effect with the clerk of the court, and send copies thereof to the debtor's creditors.55 There is no provision in the MCA that provides that the repayment of the debt must take place within a specific period of time, which means that many debtors may remain trapped by their debt.56 The intention of an administration order is to assist a debtor during a period of financial distress, and not to bind a debtor indefinitely. Regrettably it is the lack of any time limits linked to administration orders that undermine their intention.57 The administration procedure does not give

the debtor a discharge of his debts at any stage, which is a serious disadvantage of this procedure.58

The sequestration process is designed to be to the benefit of the creditors of the debtor and to provide the debtor with a discharge of his debt. In contrast, both the administration process and the debt review process are designed specifically to assist over-indebted debtors to eventually settle their debt.

4 Compositions under the South African insolvency law

The South African insolvency law provides for two forms of compositions, namely common-law compositions and statutory compositions in terms of section 119 of the Insolvency Act.59 A common law compromise allows a debtor whose estate was provisionally sequestrated to avoid insolvency by entering into a compromise with his creditors.60 This type of compromise agreement is contractual and requires the approval of all the creditors to be binding.61 The advantage of a common law compromise is that once the agreement is approved the debtor will be released from his debts and any provisional order of sequestration will be discharged.62 The incentive for creditors is in receiving a higher dividend earlier than in sequestration and in saving on sequestration costs.63 However if one or more of the creditors fails to agree, the agreement falls away.64

If a debtor's estate has been sequestrated finally, a statutory compromise gives a debtor a chance to avoid the liquidation process, obtain control of all or some of his assets and shorten the period of insolvency.65 A statutory composition requires an acceptance by creditors whose votes amount to not less than a three-fourths majority in value and a three-fourths majority

in number of all proved creditors’ votes.66 The advantage of a statutory composition for the debtor is that it does not depend on the participation of all the creditors and the decision of the majority is binding.67 However, this form of compromise does not discharge the debts of the insolvent nor the sequestration order upon reaching the required majority.68 The insolvent remains unrehabilitated but can apply for early rehabilitation immediately after receiving a certificate from the Master of the acceptance of the offer of composition.69

5 Bankruptcy in Kenya

To initiate the alternatives to the bankruptcy procedures in the Kenyan Insolvency Act a debtor must be insolvent.70 It is therefore important to mention the requirements for entering the bankruptcy process in Kenya. A bankruptcy order can be awarded on application either by the debtor himself or by his creditors. In a debtor's application, the debtor must show that he is unable to pay his debts and his application for bankruptcy must be accompanied by a statement of his financial position.71 The court will not make the bankruptcy order if his financial statement is incorrect or incomplete. The court will also not make the order if it appears that, if the order is made, the total of the applicant's unsecured debts would be less than the small bankruptcy level72 and the value of the applicant's estate would be equal to or more than the minimum value.73

In a creditor's application, the creditor must show that the debtor is unable to pay the debt74 or has no reasonable prospect of being able to pay the

debt.75 In addition, the creditor must prove that the debt is for a liquidated amount, it exceeds the bankruptcy level,76 and lastly there is no outstanding application to set aside a statutory demand in respect of the debt.77 A bankruptcy order will not be made unless these requirements are met.78

5.1 Alternatives to bankruptcy under the new Insolvency Act

Prior to the enactment of the new Insolvency Act in Kenya, the insolvency of natural persons was dealt with under the old Bankruptcy Act while corporate insolvency was dealt with under the winding-up provisions of the Companies Act. Like the South African Insolvency Act, the old Kenyan Bankruptcy Act also did not provide for alternatives to bankruptcy. The latter Act did, however, contain a provision on schemes of arrangement and compositions, under section 18. The acceptance of the proposal for a composition to satisfy his debts or a scheme of arrangement of his affairs with his creditors did not release any person who under the old Bankruptcy Act would not be released by an order of discharge, had the debtor been declared bankrupt.79 In terms of the old Bankruptcy Act there was no automatic discharge period. A bankrupt had to apply to the court for a discharge of debt and the court had the sole discretion to decide whether to discharge the bankrupt.80

It is submitted that Kenya's new Insolvency Act, contrary to the old Bankruptcy Act, was drafted with an intention of meeting the needs not only of creditors but also of debtors, as envisaged by the World Bank Report. This can be seen in its preamble, which explains its purpose to include among other things:

to provide for and to regulate the bankruptcy of natural persons; to provide alternative procedures to bankruptcy that will enable the affairs of insolvent natural persons to be managed for the benefit of their creditors;

Furthermore, the new Insolvency Act also introduced debtor-friendly interventions such as an automatic discharge after three years from the date of lodgement of the statement of financial affairs, or earlier.81 These new alternatives to bankruptcy procedures provided for in section 14 of the new Act will be discussed next.

5.2 Individual Voluntary Arrangements (IVA)

The Individual Voluntary Arrangements (IVA) replaced the old compositions and schemes of arrangement contained in section 18 of the old Bankruptcy Act. With IVA a debtor who wants to make a proposal to his creditors makes an interim application to the court instead of to the Official Receiver (OR),82 and the court has the power to order a meeting that convenes the creditors. If the debtor is an undischarged bankrupt, a notice must first be given to the OR before the interim application83 and the application may not be made while a bankruptcy application by the debtor is pending.84 While the interim application is pending, the court may prohibit the sale of the debtor's property and may stay any action, execution or other legal process against the property or person of the debtor.85 The proposal must provide for a person to be a supervisor of the voluntary arrangement.86 The court may grant an order to convene the creditors’ meeting in the view that it will help facilitate the consideration and implementation of the proposal.87 At the

meeting of creditors, the proposal will be approved by a majority of votes in number and in value of the creditors present.88

The court may order the approval of the proposal or any other order it deems fit, provided it is in the best interests of the debtor and creditors.89 The court may approve the proposal even though preferential and unsecured creditors have not approved, provided that it was approved by a majority of the secured creditors, it did not discriminate against dissenting groups, and preferential creditors’ interest were respected over unsecured creditors’ interests.90

Once approved, the proposal becomes a voluntary arrangement and binds the debtor and creditors and the provisional supervisor becomes the supervisor of the arrangement.91 Approval dismisses any bankruptcy applications against the debtor that were pending or stayed.92

5.3 Expedited procedure

The expedited procedures apply when an undischarged bankrupt wants to make a proposal for an IVA but an interim application has not been made to the court and the OR has been indicated as the supervisor in the proposal.93 After the debtor has provided the OR with the proposal and his statement of affairs94 and the OR is satisfied that the proposal has a reasonable prospect of approval, the OR arranges a meeting of creditors.95 Soon after the creditors’ decision to approve or reject the proposal, the supervisor (OR) has to report to the court.96 If approved, the proposal becomes a voluntary arrangement and is binding on all creditors and the debtor.97

The OR may thereafter apply to the court for an annulment of the bankruptcy order, but such an application may not be made during the

period in which the arrangement may be challenged in court98 and unless there are compelling reasons not to do so.99 The court may direct the debtor to act in a manner that will facilitate the implementation of the voluntary arrangement100 but the court may revoke the arrangement if it unfairly affects creditors or if there is a material irregularity.101

It is regarded as criminal conduct for a debtor to make false, misleading representation, act fraudulently or omit to do any action for the purpose of obtaining approval of the voluntary arrangement.102 A guilty debtor is liable to a fine not exceeding two million shillings103 or to imprisonment of not more than five years.104

5.4 Summary Instalment Order (SIO)

A Summary Instalment Order (SIO) is an order from the OR, upon application by a debtor or creditor with the debtor's consent, directing a debtor to pay his debts in full or in instalments,105 in the manner prescribed by the insolvency regulations.106 In addition, the OR may make orders regarding the debtor's future income or the disposal of his assets.107 The OR may refuse the application if it is not satisfied that the application:

The OR may make the order if it is satisfied that the debtor's total assets do not exceed five hundred thousand shillings, as prescribed by the insolvency regulations109 and that the debtor is unable to make payment immediately.110 However, the OR must first provide the creditors with an opportunity to make representation on the matter.111 An SIO is ineffective if it does not mention the appointment of a suitable and willing supervisor to ensure the debtor's compliance with the order.112 This is because the supervisor is responsible for ensuring the debtor's compliance with the orders made by the OR.113 For this service, the supervisor may charge remuneration provided that it does not exceed 7% of the value of the assets of the debtor that are recovered by the supervisor.114 The OR may omit the appointment of a supervisor if it deems it appropriate, however, and in such a case the debtor and the OR will act as supervisors.115

An order made by the OR is effective for a maximum period of three years, unless on the existence of special circumstances and on acceptance by the supervisor the period is extended to five years.116 The debtor, creditor or supervisor may at any time apply to the OR to change or to discharge the SIO.117 The OR may order the cancellation of the SIO, however, should the debtor fail to make instalments in the prescribed manner.

An SIO has the effect of preventing and staying all proceedings against a debtor in respect of his bankruptcy unless the debtor defaults payment or the OR approves.118 The supervisor must send out a notice of the SIO to

every proved creditor whose name appears on the debtor's application119 and those creditors shall be included in the administration of the debtor's estate under the SIO.120 A creditor who proves a claim after the SIO has been made may elect to be included in the administration of the debtor's estate.121 However, such a creditor may be paid a dividend only after the earlier creditors have been paid.122

A debtor who fails to pay amounts due under an SIO is presumed to have been able to pay that amount from the date of the order but to have neglected to pay. Should the debtor fail to pay, all stayed proceedings resume and the supervisor is required to notify the OR.123 A debtor who is the subject of a SIO commits an offence if he obtains credit of more than one hundred thousand shillings124 before all creditors have been paid, unless he has informed the credit provider that he was subject to a SIO.125 Any debtor guilty of this offence is liable to a fine not exceeding one million shillings126 or to imprisonment of not more than twelve months or both.127

5.5 The no asset procedure

The no asset procedure provides a debtor with no realisable assets with an alternative to bankruptcy.128 A debtor may commence this procedure by making an application to the OR in the prescribed form, which requires a statement of the debtor's financial position.129 The application may be rejected if the statement is incorrect.130

For the debtor’s application to succeed the OR must be satisfied that a debtor has no realisable assets,131 he has not been previously admitted to

the procedure or been previously bankrupt, his total debts are not less than one hundred thousand shillings and not more than four million shillings,132 and that he does not have the means to repay those debts.133 He may be disqualified, however, if he concealed assets with an intention to defraud his creditors and engaged in conduct that would amount to an offence if he were to be declared bankrupt. He would further be disqualified if he incurred a debt knowing that he did not have the means to repay it or if the OR is satisfied on reasonable grounds that a creditor intends to apply for the debtor to be declared bankrupt and it is likely that bankruptcy would result in a materially better outcome for the creditor, than the no-asset procedure.134 This disqualification appears contradictory to the main purpose of the no asset procedure, which is to provide an alternative to bankruptcy to debtors with no realisable assets. Secondly, if a debtor has no realisable assets, how can bankruptcy result in a materially better outcome for creditors than the no-asset procedure?

As soon as the application is received, the OR must send a summary of the debtor's assets and liabilities to all known creditors.135 Making the application prohibits the debtor from obtaining credit of more than ten thousand shillings136 without first informing the credit provider of the no-asset procedure application.137 A contravening debtor commits an offence punishable with a fine of not more than five hundred thousand shillings138 or to imprisonment of not more than six months.139 Taking into account the circumstances of the debtor under the no-asset procedure, it is submitted that the debtor should be completely prohibited from making more debt upon making the application.

On the debtor’s admission to the procedure, the OR will send a notice to the debtor and each creditor and will publish the notice in the prescribed

manner.140 On the debtor’s admission, his creditors are prohibited from enforcing debts against the debtor that were owed to the creditor at the time the debtor applied for the no-asset procedure and which would be a provable debt if the debtor would be declared bankrupt.141 Certain debts, however, remain enforceable.142 The debtor is also prohibited upon admission from obtaining credit of more than one hundred thousand shillings143 from a credit provider without informing the provider and is punishable in such an event with a fine of one million shilling144 or imprisonment of not exceeding 12 months or to both.145

The no-asset procedure commences from the date of admission. Thereafter the debtor’s debts (except excluded debts)146 are automatically discharged after twelve months, unless the period is extended for a period not exceeding 35 days after the end of the twelve-month period.147 Once discharged, the debts that became unenforceable are cancelled and the debtor is no longer required to pay any part of the debts, including penalties and interests that may have accrued.148 This does not apply, however, to debts incurred fraudulently.149 Participation in the procedure may also be terminated earlier, either by the OR150 by a creditor151 or by a debtor

applying for his own bankruptcy,152 or by a creditor's application for the debtor's bankruptcy.153 Upon early termination, the debtor's debts become enforceable and he becomes liable to pay any penalties and interest that may have accrued.154

6 Analysis

As mentioned earlier, this article seeks to answer the question whether the current alternatives available in South Africa to the sequestration process allow debtors in different financial positions to obtain a discharge. The first investigation was whether the alternatives available in South Africa to the sequestration processes provide debtors in different financial positions with a discharge of debts.

In South Africa only applicants who are able to show that sequestration will be to the benefit of creditors can access the sequestration process.155 If they are unable to meet this requirement, sequestration will not be possible and debtors, depending on their situation and the debts involved, can make use of debt review in terms of the NCA or administration orders in terms of the MCA. Due to the different nature of the debts governed by each of these two mechanisms, the same debtor may be under debt review and administration simultaneously. However, both debt review and administration orders do not provide for a discharge of debt. They provide for debt restructuring only, in order to eventually satisfy creditors' claims. The cost implications156 of debt review and the fact that it applies only to credit agreements falling within the scope of the NCA limit its suitability to

certain debtors. Administration orders are also not a favourite because they are also available only to debtors whose creditor's claims do not exceed R50 000, and they may also be expensive, taking into account the fact that the administration will pay creditors only after all the necessary expenses and determined remuneration have been deducted.

If the sequestration process has already commenced, South African debtors may enter into a compromise with their creditors. Although the common-law compromise releases the debtor from his debts and discharges any provisional order of sequestration, it requires a buy-in by all the creditors, which may be difficult to attain. The statutory compromise, on the other hand, does not discharge the sequestration order or debts, although the debtor may apply for early rehabilitation after receiving a certificate from the Master of the acceptance of the offer of composition.157

If the debt intervention in the Draft Bill is implemented in a future National Credit Amendment Act it may provide an alternative to the sequestration process that provides for a discharge of debts. However, it would still apply to certain debtors158 and, like administration orders, exclude the group of debtors with debts above R50 000. Like debt review, debtors whose debts did not arise from a credit agreement would also be excluded. A debtor who seeks a discharge of debts and who cannot meet the advantage requirement for a sequestration order would be in the same position with or without the debt intervention process in the Draft Bill.

The Kenyan Insolvency Act does not have a requirement equivalent to the South African requirement that the sequestration will be to the benefit of creditors. Instead, in Kenya a bankruptcy order will be awarded if it is shown159 or appears to be shown that a debtor is unable to pay his debts or has no reasonable prospect of being able to pay his debts.160 Further, a Court in Kenya will not give a bankruptcy order if in a debtor's application it will reduce the value of the applicant's unsecured debts to less than R12 392161 and the value of the applicant's estate would be equal or more than

R61 947162 and in a creditor's application the debt is less than R30 926.163 This appears to mean that if in a bankruptcy initiated by a debtor, bankruptcy will result in a debtor's debts being less than the small bankruptcy amount of R12 392 and his assets being equal to or more or less than the minimum amount of R61 947, such a debtors' application will be dismissed and such a debtor will not be able to access the bankruptcy procedure. If this is correct, it would also mean that if a debtor's debts are less than the bankruptcy level of R30 926 a creditor will not apply for such a debtor's bankruptcy. Consequently, such a debtor will not be able to benefit from the discharge of debts that bankruptcy eventually provides on rehabilitation. This puts such a debtor in the same position as the South African debtor who is unable to show a benefit to creditors. Unlike the South African debtor, however, the Kenyan debtor has some incentives. Firstly, his debts will automatically be discharged after three years of lodging his statement of financial affairs. Secondly, he can also make use of one of the alternatives to bankruptcy procedures provided by the new Act,164 where applicable, which are absent from the South African Insolvency Act. Despite the automatic discharge after three years incentive, the Kenyan Insolvency Act does not appear to have a requirement or process that will curb desperate debtors who may want to use fraudulent165 means to access the bankruptcy process to eventually obtain automatic discharge after three years.

The question that begs an answer now is whether the alternatives to the bankruptcy procedures in the Kenyan Insolvency Act really provide an alternative to bankruptcy that provides for a discharge of the debts of debtors with small debts and small assets and debtors with big debts but with small assets. Or do they provide an alternative that only suspends or postpones bankruptcy but not necessarily an alternative that leads to a discharge of debts. As already mentioned, Kenya introduced a wide range of alternatives to the bankruptcy procedure, which at face value appear to achieve this purpose. As indicated, these include the IVA, the expedited procedure, the SIO and the no asset procedure.

6.1 The IVA

Although the IVA replaced the schemes of arrangement and compositions under section 18 of the old Kenyan Bankruptcy Act, it is submitted that the IVA is not a new procedure but an improvement of the section 18 schemes of arrangement and compositions. With the section 18 procedures, a three-fourths majority in number and in value was required for acceptance of the proposal by creditors who had proved their claims, before approval by the court. The IVA, on the other hand, requires a majority of votes in number and in value of the creditors present before approval. With an IVA the court will grant an order to convene a creditors’ meeting only if it will help facilitate the consideration and implementation of the proposal; and in approving the proposal, the court will consider the interest of the debtor and creditors. However, while section 18(20) of the old Bankruptcy Act explicitly indicated that it did not release any person from his debts who could not be released by an order of discharge, the new Act does not mention the release of the debtor from his debts; only, that pending or stayed bankruptcy applications are dismissed.166 It appears, then, that although the court may approve an IVA and make any order it deems fit, taking account the interest of the debtor and creditors, the approval still does not provide the debtor with a discharge of his debts. It leads only to the dismissal of bankruptcy applications.

The outcome of the IVA is similar to those of both the South African common law compromise and the South African statutory compromise, however. Like the common law compromise, the IVA releases the debtor from any bankruptcy applications and the debtor is therefore able to avoid the bankruptcy procedure and its costs.167 Like the common law compromise,168 a creditor may still challenge the decision to approve the proposal, and in such a case the court may revoke the approval.169

The IVA is also similar to the statutory compromise in that it appears that it does not discharge the debtor from the debt itself. The debtor has to pay his debt according to the voluntary arrangement, under supervision.170 If the debt amount has not been paid at the end of the arrangement, the Kenyan

Insolvency Act provides that the debtor will then become liable for the outstanding amount, payable to that specific creditor.171

6.2 The expedited procedure

The expedited procedure appears to be an accelerated IVA, except that the meeting of creditors is instead arranged by the supervisor (OR).172 It appears, however, that this procedure is stricter than the IVA because if the proposal is accepted by the creditors and approved by the court, pending or stayed bankruptcy applications are not dismissed automatically as is the case with IVA. Instead, an application may be made by the OR to annul the bankruptcy order. Further, the IVA has heavy sanctions for committing fraudulent actions in order to obtain approval of the voluntary arrangement.173 Like the IVA, the expedited procedure does not provide for the discharge of debts.

6.3 The SIO

The SIO is similar to both the South African NCA's debt review process and the magistrates' court administration order. Like debt review, the SIO is an order instructing the debtor to pay his debts in instalments. The SIO requires that the instalments be paid in the manner prescribed by the Insolvency Regulations174 and that the OR must provide creditors with an opportunity to make representations before making the order. The OR is also allowed to make other orders.175 With debt review, the court grants orders only in accordance with the terms of the debt counsellor's recommendations, and as permitted by the NCA.176

A SIO does not discharge debts, but unlike debt review, which only postpones debt enforcement and does not protect a debtor from sequestration applications, a SIO suspends proceedings against the debtor but also suspends bankruptcy applications against the debtor.177 A SIO may be discharged, changed or cancelled on application by the debtor, creditor

or supervisor, but generally it is effective for a maximum period of three years, unless extended to five years.178

Whereas debt review prevents a debtor under debt review from entering into any new credit agreements, except as permitted by the NCA, a debtor who is the subject of a SIO is only prohibited from obtaining credit of more than R12 975. If the debtor informed a credit provider before getting credit above the credit limit that he is the subject of a SIO, the debtor would not have committed an offence.179

In debt review the supervisor in a SIO, like a debt counsellor, is permitted to receive remuneration.180 However, the OR may decide not to appoint a supervisor where necessary and thereby save on supervisor costs, while the appointment of a debt counsellor is not optional. It is submitted that saving costs is important, taking into account the fact that a SIO is granted to debtors who have assets valued below R61 526.

Debt review, administration orders181 and SIOs are all expensive, but with debt review there is no monetary limit on the total outstanding debt or the debtor's total number of assets for a debtor to apply for debt review. In this respect, debt review appears better. At the crux of debt review, however, is the fact that it must be possible to re-arrange the debt, the debtor must have a steady income, and it applies to credit agreements only, whereas SIO applies to all types of agreements.

Even though the proposed debt interventions in the Draft Bill provide for the discharge of debt for certain debtors, like debt review they can be accessed only by debtors whose debts arose from credit agreements, and the applicant’s debt must not be more than R50 000. This is similar to a South African administration order, which is available to debtors whose claims do not exceed R50 000 only, and to the SIO, which is available to debtors whose total assets do not exceed R61 526 only. This limitation leaves those

debtors who cannot meet these monetary limits without an alternative to bankruptcy.182

6.4 The no asset procedure

The no asset procedure could be the true alternative to the bankruptcy procedure for debtors who fall outside the bankruptcy requirements. To participate, a debtor must show that he has no realisable assets, his debts are between R12 975 and R519 012, and he has no means to pay those debts. On his admission to the procedure, his creditors cannot enforce their claims nor apply for the debtor's bankruptcy, and upon his discharge after 12 months from admission, all his debts are discharged including all accrued penalties.183 This comes at a high price, however, because there are harsh penalties for debtors who contravene the prohibitions.184 The penalties become even heavier for debtors who obtain credit on admission to the procedure.185 In addition, if the procedure is terminated earlier as a result of fraudulent actions by the debtor or because of a bankruptcy application by a debtor or a bankruptcy application by a creditor whose debts remain enforceable as specified in section 351(2)186 of the new Act, all the debtor's debts become enforceable, including any penalties and interests that may have accrued.187

In South African law there is no procedure that provides a discharge to debtors with no assets and who have debts above R50 000. The debt intervention in the Draft Bill, as indicated, applies to certain debtors only. In an attempt to allow debtors in all financial positions to become economically capable through a discharge, South African lawmakers should consider including an intervention similar to the Kenyan no-asset procedure in the Insolvency Act. Unlike the Kenyan no asset procedure, however, the South African procedure should prohibit a debtor who has been admitted to the process from obtaining more credit altogether, and not only where the

debtor has not informed the credit provider. The penalty for contravening such a prohibition should be more stringent, to serve as a deterrent.

Lastly, a debtor should not be disqualified from admission into the process because it appears that a creditor intends to apply for the debtor to be declared bankrupt. The aim of the no asset procedure is to avoid bankruptcy. Secondly a debtor who is a candidate for the procedure would not be a good candidate for bankruptcy, because he has no realisable assets which could benefit creditors.

7 A few closing comments

Alternatives to the sequestration process in South Africa should ideally curb the abuse of the sequestration process created by the advantage requirement; provide all debtors with opportunities to pay their creditors in an incentivised manner with the hope of discharge; release certain debtors from their responsibilities earlier; and provide them with a last chance of escaping the sequestration process and avoiding the stigma that accompanies insolvency.

The South African alternatives to sequestration clearly do not provide for a discharge of debts and dismissal (or even avoidance) of insolvency proceedings. Although the Kenyan bankruptcy procedure also excludes certain debtors from the procedure, an important lesson to be learned from the Kenyan insolvency system is that it provides debtors with the option of applying for one of the alternatives to bankruptcy procedures provided by the new Act itself.188 It is submitted that mentioning the alternatives as early as section 14 in the new Act gives the impression that the lawmakers wanted debtors to first be aware of these alternatives before even considering the bankruptcy application in sections 17 and 32 of the new Act, thereby educating debtors about other ways of obtaining a discharge outside of bankruptcy.

Although some of the alternatives, namely the IVA and the expedited procedure, do not provide a discharge on the approval of the proposal, stayed and pending bankruptcies are dismissed. A debtor is therefore able to avoid bankruptcy, its costs and the stigma associated with bankruptcy. While debt review is intended to allow over-indebted debtors to obtain relief from their over-indebtedness while still meeting their financial obligations with the aim of eventually settling their debts, this purpose appears to be

defeated if sequestration applications can still be made. It is therefore submitted that the debt review procedure should be amended to permit a debtor to at least be able to avoid sequestration applications during its existence.189

The SIO also does not discharge debts during the existence of the order but it suspends all proceedings against the debtor, including bankruptcy proceedings. Its biggest advantage is that it has a determined period of expiration: three years extended to a maximum period of five years. This excuses the debtor from having to pay the instalments for years. To cater for debtors who are unable to make weekly or monthly payments, an arrangement can be made that the instalment be payable every four months.190 To reduce the costs of the procedure, the requirement of a supervisor can be dispensed with, and a debtor can still obtain credit of not more than R12 975. Although in Kenya an SIO is essentially effective for the same period as bankruptcy, it is a better alternative than bankruptcy because if successful, debts are paid in full in three years, it avoids bankruptcy and the stigma associated with it, and it may have reduced costs. Be that as it may, the debtor may lose some of his assets if the OR makes an order regarding the disposal of assets.191

In South Africa the no asset procedure could be the true alternative to the sequestration procedure. It caters for debtors who have no realisable assets but who have debts between R12 975 and R519 012.192 It suspends all claims against a debtor, including bankruptcy applications. After twelve months from admission, the debtor is discharged from all his debts, including any penalties that may have accrued. The debtor is therefore released from his debts earlier than in bankruptcy, and the debtor avoids bankruptcy completely. In order to advance the re-establishment of a debtor's economic capability, as purposed by the World Bank Report, it is submitted that the South African law makers should consider the alternatives to bankruptcy provisions in the Kenyan Insolvency Act. A debt intervention process should ideally provide a discharge and apply to all debtors (including those with no assets and debts above R50 000) and to all agreements. As the Insolvency Act is the only legislation that provides a

process that discharges debts upon rehabilitation, such a debt intervention should ideally be included in the Insolvency Act and preferably before the voluntary surrender and compulsory sequestration processes are explained. That would hopefully make consumers aware of such debt intervention before considering the sequestration process.

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List of Abbreviations