A candidate who passes this paper should be able to:

  • Evaluate the viability of recovering debts through legal proceedings
  • Comply with the procedures for recovery of debts through legal proceeding
  • Analyze the alternative models of debt recovery
  • Apply knowledge of insolvency law in an international perspective.



16.1     Debt and borrowing

  • Meaning of debt
  • Types of debt
  • Importance of borrowing
  • Debt instruments
  • Creditors and debtors rights
  • Debt collection options

16.2     Debt protection

  • Meaning of debt protection
  • Alternatives to debt protection
  • Debt protection insurance
  • Distinction between debt protection insurance and credit insurance

16.3 Debt management

  • Meaning of debt management
  • Types of debt management
  • Rescheduling debt
  • Extension of time
  • Foreclosure
  • Conversion of debt to equity
  • Payment of interest first
  • Suspended payments
  • Surrender of securities
  • Receivership

16.4     Preliminary considerations before initiating or defending debt

  • Recovery suits
  • Letters of demand
  • Capacity to sue
  • Mediation
  • Acknowledgement of debt
  • Evidence of indebtness
  • Statute barred debts
  • Viability of debt recovery
  • Availability of the debtor
  • Enforcement and execution

16.5     Debt recovery through legal suits

16.5.1 Institution of suit

  • Locus standi
  • Jurisdiction
  • Pleadings
  • Service of summons

16.5.2 Hearings

  • Summary judgment
  • Attachment before judgment
  • Presentation of evidence

16.5.3 Judgement and decree

  • Extraction of decree
  • Execution of decree
  • Attachment and sale of property
  • Attachment of debts
  • Garnishee orders
  • Committal to civil jail

16.6     Alternative dispute resolution mechanisms

  •  Negotiation
  •  Conciliation
  •  Meditation
  • Arbitration

16.7     Bankruptcy

  • Meaning
  • Nature of bankruptcy
  • Alternatives to bankruptcy
  • Bankruptcy proceedings
  • Rights of creditors
  • Consequences of bankruptcy
  • Discharge of a bankrupt

16.8     Dissolution of partnership

  • Break-up of a partnership
  • Effects of break-up
  • Restriction of ceasing to be a partner on or after break-up
  • Protection of property acquired after break-up
  • Winding up partners
  • Distribution of partners assets on winding up
  • Dissolution of a partnership which has broken up
  • Power of court to appoint administrator
  • Order appointing provisional liquidator
  • Power of court to fix remuneration of receivers and managers
  • Appointment of a receiver as liquidator
  • Provisions relating to receiver or manager appointed

16.9     Insolvency law

  • Meaning of insolvency
  • Receivership
  • Types of liquidation
  • Official receiver/liquidator
  • Committee inspection
  • Distribution of assets
  • United Nations Commission on International Trade Law (UNCITRAL) legislative guide on insolvency law
  • United Nations Commission on International Trade Law (UNCITRAL) model law on cross border insolvency
  •  World Bank principles and guidelines for effective insolvency and  creditors rights system.

16.10   Emerging issues and trends



TOPIC                                                                                                              PAGE NO.

  1. DEBT AND BORROWING ………………………………………………………….6
  2. DEBT PROTECTION ……………………………………………………………….23
  3. DEBT MANAGEMENT……………………………………………………………..27
  3. BANKRUPTCY…………………………………………………………………….130
  4. DISSOLUTION OF PARTNERSHIP………………………………………………144
  5. INSOLVENCY LAW………………………………………………………………162
  6. EMERGING ISSUES AND TRENDS……………………………………………..171







Meaning of debt

Debt is an amount of money borrowed one party from another. Debt is used many corporations and individuals as a method of making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest

How Debt Works

The most common forms of debt are loans, including mortgages and auto loans, and credit card debt. Under the terms of a loan, the borrower is required to repay the balance of the loan a certain date, typically several years in the future. The terms of the loan also stipulate the amount of interest that the borrower is required to pay annually, expressed as a percentage of the loan amount. Interest is used as a way to ensure that the lender is compensated for taking on the risk of the loan while also encouraging the borrower to repay the loan quickly in order to limit his total interest expense.


Credit card debt operates in the same way as a loan, except that the borrowed amount changes over time according to the borrower’s need, up to a predetermined limit, and has a rolling, or open-ended, repayment date. Certain types of loans, like student loans, can be consolidated.


Corporate Debt

In addition to loans and credit card debt, companies that need to borrow funds have other debt options. Bonds and commercial paper are common types of corporate debt that are not available to individuals.

Bonds are a type of debt instrument that allows a company to generate funds selling the promise of repayment to investors. Both individuals and institutional investment firms can purchase bonds, which typically carry a set interest, or coupon, rate. If a company needs to raise $1 million to fund the purchase of new equipment, for example, it can issue 1,000 bonds with a face value of $1,000 each. Bondholders are promised repayment of the face value of the bond at a certain date in the future, called the maturity date, in addition to the promise of







Debt protection is a contractual agreement between your financial institution and your borrowers to cancel or suspend all or part of the obligation to repay a loan due to specified events, such as death, disability and involuntary unemployment.

How debt protection works

There are different kinds of debt protection. Some will extinguish part or all of a debt if you die during the coverage term. Others guard against unemployment, promising to cover a certain number of minimum monthly payments if you’re laid off. There are plans that will make your payments if you become disabled. There are even plans that pay three minimum monthly payments if you get married or divorced, adopt a child, or buy a home.

But as I said above, the devil is in the details. For instance, benefit caps usually apply – the max the protection will pay could be as little as Sh.50,000. For unemployment protection, qualifications may include being a permanent employee working more than 30 hours a week for at least three months, then qualifying for state benefits after two months without work. And for either disability or unemployment, you may have to provide regular proof you can’t (find) work.


Don’t even think about debt protection without understanding the fine print. Ask about limitations, waiting periods, how to cancel, and whether you can get any refund for doing so.


Cost vs. benefit

As with anything you buy, it’s important to consider what you pay for what you get.

Government Accountability Office study from 2011 revealed creditors took in about $2.4 billion for debt protection that year on 24 million accounts – but paid only about 21 percent of that back in benefits. That’s super-profitable for them, which makes it questionable for you.

Prices typically fall in the range of 85 cents to $1.35 per $100 owed, so on a $5,000 credit card balance, you’ll pay up to $67.50 a month, or $810 a year. In addition, since the cost is added to the balance, you pay interest on it too.






A debt management plan (DMP) is an agreement between a debtor and a creditor that addresses the terms of an outstanding debt. This commonly refers to a personal finance process of individuals addressing high consumer debt. Debt management plans help reduce outstanding, unsecured debts over time to help the debtor regain control of finances. The process can secure a lower overall interest rate, longer repayment terms, or an overall reduction in the debt itself


What is a Debt Management Plan?

A debt management plan is NOT a loan.  In a typical program, debt management companies work with creditors on your behalf to reduce your monthly payment and interest rates on your debt and waive or reduce any penalties. The parties agree on an affordable payment schedule that allows say 3-to-5 years to pay off your debt.


A debt management plan is part of the package of debt consolidation plans that are designed to help people regain control of their finances while reducing unsecured debts. An unsecured debt is one that is not backed collateral, and includes credit cards, medical bills and student loans.


It is one of several ways you can take control of your debt and reduces the number of payments you make each month and can save you money in interest and fees.


Those who enroll make monthly deposits with a credit counseling organization, which then is used to pay the debts according to a predetermined payment schedule developed the counselor and creditors. Your monthly payment is tailored to what the customer can afford, and you know before agreeing to take part in the program what that monthly amount is. An analysis of household income vs. expenditures determines the monthly payment.


Advantages of a Debt Management Plan

  1. Offers credit card consolidation without a loan






The proceedings in bankruptcy are begun the presentation to the court of a Bankruptcy Petition.  This petition asks the court for a Receiving Order to be made in respect of a debtor’s property.  The petition may be presented either the Debtor himself or a Creditor.  If it is presented a creditor the petition must be founded or based on an alleged act of Bankruptcy which has occurred within 3 months before the presentation of the petition.  Indeed the acts of Bankruptcy are in effect statutory tests of insolvency.

If it is the debtor himself who presents the petition that in itself constitutes an act of bankruptcy.  Upon hearing the petition the court may dismiss it, if it has no merit or make a receiving order if it is found to be with merit.  This order does not make the debtor bankrupt but only places his property in safe custody pending the outcome of the proceedings.


The first meeting of creditors is then held at which it is determined whether a composition or scheme of arrangement if one is submitted the debtor  shall be accepted or whether application shall be made to the court to adjudicate the debtor’s bankruptcy.  If the court decides to adjudicate the debtor bankrupt it makes an Adjudication Order and the debtor will then become bankrupt.  The debtor’s property will then vest in his trustee in bankruptcy who will collect in the property and distribute it among those creditors who have proved their debts.


The bankrupt must also submit himself to a Judicial Public Examination and at any time after conclusion of this public examination the bankrupt can apply for his Discharge.


If the court makes an order of discharge the bankrupt is released from all his debts with certain exceptions provable in bankruptcy and is freed from disabilities against some exceptions which were imposed upon him the bankruptcy.





Section 2 of the Civil Procedure Act defines a suit as all civil proceedings commenced in any manner prescribed the civil procedure Act. It should be noted that even though a matter might not have been provided for under the Act, the courts can still entertain it. This provided under Section 3 of the Civil Procedure Act, which provides that court has inherent power to adjudicate any matter, brought before it the absence of any procedure not withstanding. Furthermore, under Section 3(a) the courts have been given a wide discretion to make such orders as the end of justice requires. Section 3 (a) emanates from the sense of equity.


Essential of a valid suit

It must have the following:

  • Parties to a suit
  • A cause of action
  • Subject matter
  • Relief sought i.e. what you want the court to do for you e.g. payment of the actual amount, specific damages, general damages, cost of the suit


Locus Standi

In law, locus standi means the right to bring an action, to be heard in court, or to address the Court on a matter before it. Locus standi is the ability of a party to demonstrate to the court sufficient connection to and harm from the law or action challenged to support that party’s participation in the case. For example, in the United States, a person cannot bring a suit challenging the constitutionality of a law unless the plaintiff can demonstrate that the plaintiff is (or will be) harmed the law. Otherwise, the court will rule that the plaintiff “lacks standing” to bring the suit, and will dismiss the case without considering the merits of the claim of unconstitutionality. In order to sue to have a court declare a law unconstitutional, there must be a valid reason for whoever is suing to be there. The party suing must have something to lose in order to sue unless they have automatic standing action of law.






“Meet and sit down and try and arrive at a conflict resolution without help of a third party”

Negotiation is any form of communication between two or more people for the purpose of arriving at a mutually agreeable solution. In a negotiation the disputants may represent themselves or they may be represented agents and whatever the case, whether they are represented or not represented, they have control over the negotiation process.

It is basically talking or communicating. It is the two parties alone, without a neutral third party.

There are two extreme styles of negotiating. There is what is referred to as the competitive bargaining style and there is the co-operative bargaining style or hard bargaining and soft negotiating.


Competitive/ Hard negotiation

The competitive negotiators are concerned with the substantive results. They advocate extreme positions. They create false issues, they mislead the other negotiator and they even bluff to gain advantage. It is rare that they make concessions and if they do, they do so arguably. They may even intimidate the other negotiator.


Advantages of competitive negotiation:

  1. The hard negotiator is likely to get a better bargain especially in circumstances where such a negotiator is negotiating with a co-operative negotiator;
  2. If a negotiator is a professional negotiator i.e. one who is called upon to negotiate on behalf of parties, he is likely to develop a reputation which will be useful in future negotiations;
  3. The competitive negotiator is not open to easy manipulation;
  4. A negotiator of that style is also likely to take initiative and to take a lead role in negotiations;





Reference materials

  1. Halsburys Laws of England volume 2nd and 3rd edition.
  2. Bankruptcy Act Cap Laws of kenya.
  3. Case Law.



What is bankruptcy?

Bankruptcy is a proceeding which the state takes possession of the property of a debtor an officer appointed for that purpose and such property is realized and subject to certain priorities, distributed amongst the persons to whom the debtor owes money or has incurred liabilities.

The effect of bankruptcy is that the bankrupt becomes disqualified in enjoying some citizen’s right and freedoms for instance, to contract & capacity to contract.

The debtor (bankrupt) obtains protection from the suits his creditors.


What is an Act of Bankruptcy?

An Act of bankruptcy is an act committed the debtor which manifests his insolvency status. It is an over act of his in ability to pay his debts:

An overview of the stages of bankruptcy proceedings

  1. Debt or commission of an Act of bankruptcy (Within 3 months from the Acts of bankruptcy)
  2. Presentation of petition (debtor or in debtor
  3. (petition is heard)
  4. Receiving order   – (appointing of a receiver manager)
  5. Creditors meeting considers scheme of payment if there is no appraisal.
  6. Adjudication Order – (Property becomes divisible and vests in a trustee.)
  7. Investigation of property available distributions
  8. Proof of debts
  9. Distribution of property
  10. Order of discharge




Important definitions (Partnership Act)

Partnership means the relationship which exists between persons who carry on business in common with a view to making a profit.

Partnership agreement refers to an agreement between, persons carrying on business in common with a view to making a profit.

Partnership document in relation to a partnership includes:

  • A business letter;
  • A written order for goods or services to be supplied to the partnership;
  • An invoice or receipt issued in the course of the partnership business; or
  • A written demand for payment of a debt arising in the course of the partnership business,

Partnership loss in relation to a person, who is a partner, means the loss incurred the relevant partnership business incurred while the person is a partner and includes a loss of a capital nature.

Partnership obligation means a partnership debt or any partnership liability.

Partnership of defined duration means a partnership in respect of which the partnership agreement provides that the partnership is to end on the expiry of a specified period; or on the completion, of a venture that the partnership was formed to undertake.

Partnership profit in relation to a person, who is a partner, means the profit of a partnership business derived while the person is a partner.

Partnership property means property to which the partnership is beneficially entitled, whether or not the property is held in the partnership name.

Person interested in winding up of a partnership means a person who ceases to be a partner on or after the break up; or in the case of a deceased partner, the partner’s personal representative; or if a person ceases to be a partner virtue of his bankruptcy, the insolvency practitioner appointed in relation to the partner.

Profits include profits of a capital nature and property includes money and all other property, real or personal, heritable or moveable, including things in action and other intangible or incorporeal property.





Insolvency means the inability to pay one’s debts as they fall due.

A business becomes insolvent when its liabilities exceed its assets. However, in practice, insolvency comes about when a business cannot raise enough funds to meet its obligations as they fall due. Properly called technical insolvency, it may occur even when the value of a business’ total assets exceeds its total liabilities. Mere insolvency does not afford enough ground for lenders to petition for involuntary bankruptcy of the borrower, or force liquidation of the business. Prior to the enactment of the Insolvency Act on September 11th 2015, liquidation was often the creditor’s only recovery option. The Insolvency Act improved the options providing additional alternatives such as: (i) Administration, and (ii) Company Voluntary arrangements.


Since its enactment, we have seen several insolvent companies come under administration as prescribed in the law, thereensuring they remain a going concern, and in the process ensure all the stakeholder’s interests are protected.



According to PWC, a Receivership is a remedy available to secured creditors to recover amounts outstanding under a secured loan in the event the company defaults on its loan payments. A Receiver may also be appointed in a shareholder dispute to complete a project, liquidate assets or sell a business.


In Kenya, the Central Bank of Kenya (CBK) has previously put over 3 banks under the Kenya Deposit Insurance Corporation (KDIC) receivership which include the recently troubled Imperial Bank, Dubai Bank and now recently Chase Bank.


Typically, the process begins with the appointment of a Receiver either the secured creditor under a security agreement (“Privately Appointed Receivership”) or the Court on




Rise in demand for integrated debt collection software solutions


End-users prefer vendors that provide integrated software suites over different software as it may lead to integration issues. Integrated products and software suites from the same vendor integrate with each other seamlessly and support other functions or processes.


“Integrated debt collection software completely automates the document and bill presentment. It also ensures adherence to regulations and e-compliance, while accelerating debt payment as well as managing accounts receivable and account information. Some of the vendors in the debt collection software market already provide software that is compatible and can be integrated with other software,” says Amrita Choudhury, a lead analyst at Technavio for research on enterprise application.


Emergence of debt collection mobile apps


Transitioning of businesses to mobile technology will not only give enterprises more accurate information but save hundreds of hours of human effort. The increasing adoption of mobile devices for professional purposes is a major trend in the global debt collection software market. Law firms, collection departments, and accounts receivable management agencies are increasingly focusing on adopting debt collection mobile apps because it provides them the flexibility to access their credit score and credit report, and also receive details about factors affecting their credit score whenever and wherever they need.


“End-users are using debt collection mobile apps to keep themselves up-to-date with debt accounts and track progress toward meeting debt goal. Most importantly, it provides an update on how long will it take to get out of a debt based on details about debt and payment amounts. These mobile apps provide real-time visibility into debt collection activities and performance with industry-specific dashboards, reports, and productivity metrics,” adds Amrit.

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