8 October 2010

Kenya: Civil Jail is Scrapped But Lenders Can Still Use the Weapon of Bankruptcy

Nairobi — A reader in Nyeri recently wrote to say he was in the process of filling for bankruptcy. "I have been put in civil jail on and off by debtors and now I practically have no money and property whatsoever," he said.

He was seeking advice on the process of filing for bankruptcy and whether it offers a solution to his insolvency. Bankruptcy, voluntary or initiated by persons you owe money, stops creditors from personally harassing you trying to collect what you owe them. You cannot be thrown in jail for not paying your debts.

However, you can still go to jail for other offences related to the bankruptcy law. For example, under section 26 of the Bankruptcy Act, the court may order your detention if, after service of a bankruptcy petition, you remove any goods in your possession above the value of Sh100, without the leave of the official receiver or trustee.

Today, of course, the reader from Nyeri does not have to worry about going to jail. Justice Martha Koome ruled on September 29, 2010, that civil jail was unconstitutional. Her ruling, however, can be overturned by a clever judge. She relied on the meagre words of Article 11 of the International Covenant on Civil and Political Rights.

On May 1, 1972, Kenya acceded to the Convention and it now forms part of the Kenyan law by virtue of Article 2 (6) of the Constitution. It was, however, not domesticated by Parliament. Article 11 merely states: "No one shall be imprisoned merely on the ground of inability to fulfil a contractual obligation."

A judge who wants to overturn the ruling could argue that Article 11 should be applied in accordance with the existing municipal law -- section 38 of the Civil Procedure Act. Section 38 states that before a court issues an order for a debtor to be imprisoned, the court has to be satisfied, among other things, that the debtor has had the means to pay the money owed, or a substantial part of it, but has refused or neglected to pay.

The judge could argue that civil jail is not incompatible with Article 11 when other means of enforcement have failed. He could argue that Article 11 prohibits imprisonment only when there is no reason for resorting to it other than the fact that the debtor is unable to fulfil a contractual obligation.

Where there are other reasons for invoking the penalty, he would say, for example when the debtor, by acting in bad faith or through fraud, is unable to pay his debts, imprisonment is not incompatible with Article 11. Moreover, Justice Koome's ruling did not touch on the Bankruptcy Act, which provides money lenders with yet another weapon to use against debtors.

One of the primary objectives of the Act is to safeguard the interests of the creditors. When you are adjudicated bankrupt, all your assets are taken over by a trustee and distributed among your creditors. You are also disqualified from being appointed a magistrate, elected or appointed mayor, member of a local authority council, school committee or road board.

In the United States, bankruptcy gives debtors a fresh start. It carries no stigma. Millions of Americans seek relief from debts and claims of creditors by filing for bankruptcy under Chapter 7 of the Bankruptcy Code. Under American bankruptcy law, a lot of your property including food, clothing, personal effects and furnishings, is exempt from being taken to pay creditors.

And only 25 per cent of your net wages can be taken to satisfy a court judgment (up to 50 per cent for child support and alimony). But in Kenya, bankruptcy carries a stigma and is potentially ruinous. All your property comes under the direction of a trustee.

Only the tools (if any) of your trade and the necessary clothes and bedding for yourself, wife and children, to a value (inclusive of tools) not exceeding Sh500 is exempt from seizure. And your salary or income may be attached in such manner as the court may direct.

Bankruptcy could be worse than civil jail, which requires a maximum of only six months imprisonment. Debtors in Kenya are not out of the woods yet.

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