More often than not people tend to confuse between an insolvency and bankruptcy. These are not interchangeable words and they bear different meanings and consequences. Being bankrupt and being insolvent are two different financial status or conditions.
By a simple definition, insolvency means a financial condition in which one is unable to meet obligations as they mature in the ordinary course of business. In other words, a person’s debts (liabilities) exceed his or her assets. Bankruptcy on the other hand, is a legal process or proceeding for liquidating properties and assets which a debtor owns to pay off his debts.
It is worth noting that when an individual (natural person) is declared by a court to be insolvent, he is said to be bankrupt but a corporate is said to be liquidated. Technically, bankruptcy is used for individuals and liquidation for corporate entities. As a result, someone who is bankrupt is insolvent, but someone who is insolvent isn’t necessarily bankrupt.
When one is insolvent, there are other ways of addressing the situation without approaching the court. These may include but not limited to raising cash, renegotiating with creditors etc. However, when these means prove futile a person may have but one option and that is, petition for bankruptcy.
The bankruptcy issues in Tanzania are governed by the Bankruptcy Act, Cap 25 R.E 2019. This article discusses albeit in brief the aspects of the Bankruptcy proceedings as provided under the above-mentioned Act.
In the ordinary course of things, bankruptcy proceedings can be initiated when a person (debtor) has failed to repay his debts, that is to say, when one is insolvent. Legally speaking, the proceedings can be initiated when there is an act of bankruptcy. Section 3(1) (a)-(h) of the Bankruptcy Act, list 8 acts which are considered as acts of bankruptcy. These acts are technical triggers of the bankruptcy proceedings. The list is as follows:
(a). Assignment and Conveyance of the Property to the Trustee
If a debtor conveys or assigns his property to a trustee for the benefits of his creditors, whether this is done in Tanzania or elsewhere, he is said to have committed an act of bankruptcy. Therefore, any assignment or conveyance of the property to the trustee with such purpose may qualify as an act of bankruptcy and trigger the proceedings.
(b). Fraudulent Conveyance, Gift or Transfer of Property
When a debtor conveys, deliver, transfer or give as a gift his property or any part thereof fraudulently, he is said to have committed an act of bankruptcy. It is immaterial whether that act was done in Tanzania or elsewhere.
(c). Void Conveyance, Transfer or Charge of the Property
This happens when a debtor conveys, transfers or creates a charge on his property which is deemed to be void under this Act or any other law if he were adjudged a bankrupt. It is also immaterial whether the act was done in Tanzania or elsewhere.
(d). Acts intending to Delay or Defeats Creditors
When a debtor does any of the following acts with intention to defeat or delay his creditors, he is said to have committed an act of bankruptcy: –
- Departs out of the United Republic of Tanzania;
- Being out of Tanzania remains out of the Mainland Tanzania;
- Departs from his dwelling house; or
- Does not come to work (keeping house)
(e). Execution by Seizure-Goods held by Bailiff for 21 days
This occurs when there is an execution emanating from the civil proceedings against the debtor. That execution has been levied by seizure against the debtor’s goods and the goods have been either sold or held by the bailiff for twenty-one days.
(f). Filing a Declaration of Inability to Pay Debts
This is when a debtor files in the court a declaration of his inability to pay his debts or presents a bankruptcy petition against himself.
(g). Served with a Bankruptcy Notice
This happens when a creditor who has obtained a final judgment or final order against a debtor serve him with a Bankruptcy Notice as provided under section 4
of the Act. And after receiving that notice, the debtor does not raise a counter-claim, set off or cross-demand which equals or exceeds the claimed sum.
(h). Giving Notice of Suspension of Debts Payment
This occurs when a debtor gives notice to any of his creditors that he has suspended, or that he is about to suspend, payment of his debts.
Who may Petition for a Bankruptcy?
When any of the above acts of bankruptcy is committed, either the debtor himself or creditor may bring a petition for bankruptcy before the Court. However, for a creditor to be able to present a petition for a bankruptcy against the debtor, the conditions set out under section 6 of the Act must be satisfied. These are: –
- The debt must at least amount to Tshs.1,000;
- The debt must be a liquidated sum;
- The debt must be payable either immediately or at a certain future time;
- The bankruptcy act must have occurred within 3 months before presentation of petition; and,
- The debtor is domiciled in Tanzania or was domiciling in Tanzania within a year before the presentation of the petition.
Which Court has Jurisdiction to Entertain Bankruptcy Petition
According to section 97 of the Bankruptcy Act, the High Court has jurisdiction to entertain bankruptcy petition. However, the Chief Justice has powers to delegate the jurisdiction to any subordinate courts. This may be general delegation or delegation for a particular case or classes of cases.
What happens when Petition is Presented
When the petition is presented in compliance with the provisions of the Act, the Court may, if satisfied issue a RECEIVING ORDER for the protection of the estate of the debtor. When a receiving order is made, an OFFICIAL RECEIVER is thereby constituted. The receiving order is then required to be published in a gazette as provided under section 13 of the Act. The official receiver will be in charge of the properties of the debtor. The official receiver is required to conduct a first meeting of the creditors in order for creditors to consider whether to accept the composition or scheme of arrangement as proposed by the debtor (if any) or to resolve that the debtor be adjudged a bankrupt.
Consequences of the Receiving Order
When the receiving order is issued, no action or claim can be brought against the debtor by any unsecured creditor with respect to debt unless with a leave of the Court. Technically, this provides a relief to the debtor since he is not legally bound to pay the debts and the remedies which the creditors have against the debtors are suspended.
Adjudication of Bankruptcy
If the creditors meeting resolves that the debtor be adjudged a bankrupt, or the composition and scheme of arrangement proposed by the debtor is not approved within 14 days or such other time as allowed by Court or if the debtor himself with concurrence of the official receiver agrees in writing to be adjudged a bankrupt, a Court shall then adjudge a debtor BANKRUPT.
Consequences of Being Adjudged Bankrupt
Once adjudged bankrupt, the properties of the debtor become divisible amongst his creditors and vest in a trustee. Notice of bankrupt adjudication shall then be published in a gazette. The notice contains name of the bankrupt, his residential and business address, description and date of the adjudication.
Technically speaking, when a debtor is adjudged bankrupt, he is medically alive but legally as good as dead. This is because, the bankruptcy adjudication has an impact of restricting the bankrupt to do certain things as other living persons. Some of the things which a bankrupt cannot do include the following: –
- Entering into any kind of contracts, for he is deemed to be incompetent person;
- Being employed in any trade or business unless with the permission of the court;
- Managing any trade or business unless with the permission of the court;
- Accessing credits in financial institutions; etc.
Being adjudged a bankrupt may be a blessing and curse at the same time. On one hand, it is a blessing since the debts are discharged and remedies of the unsecured creditors are suspended while on the other, the bankrupt’s freedom to do certain things is restricted as stated above.
Therefore, individuals considering bankruptcy should weigh up the pros and cons mentioned above before deciding whether to proceed. It goes without saying that bankruptcy is a complex and technical process which needs guidance of legal and financial advisor(s). Victory Attorneys & Consultants are experts on this and other liquidation processes.