kenya:Mobile cash headache for law on bankruptcy

When the old financial laws regarding implementation of bankruptcy orders were applied to an individual in Kenya’s traditional legal landscape, one was not allowed to carry more than Sh100 in their pockets.

The time tested legal provision, which has been the last resort by individuals who are unable to service their debt, now faces several headwinds with the changing financial times and particularly the move to cashless transactions.

Experts say although the declaration of bankruptcy does not discharge one from debt obligation but only protects them from creditors within the period of bankruptcy, the way of determining whether one’s  economic conditions have changed, necessitating his debt obligation to be reimposed, remain gray in the modern cashlite economy.

Once a bankruptcy order is made, the property of the bankrupt and the power he could have vested over that property vests in a trustee.

The only assets allowed are his tools of trade, necessary household furniture and personal effects, and even a motor vehicle if its value is not more than Sh1 million.

Later, the Insolvency Act was introduced with the sole aim of helping the individual or company, return to stability and not destroy them.

The move is a shift from the previous focus where debtors who defaulted were punished by being sent to prison, hurting the very businesses from which they were expected to generate funds to settle the debts.

Lawyers argue that the use of mobile money platforms will now be the new avenues through which the bankrupt persons can use to circumvent the bankruptcy laws and continue transacting beyond what has been provided for by law.

Data from the Central Bank of Kenya shows that Kenyans transacted Sh3.35 trillion through mobile cash in 2016 compared to Sh2.82 trillion the previous year.

The growth, which crossed the Sh3 trillion mark for the first time, comes on the back of an increase in mobile lending apps.

Bankers believe that the shift in the law, to assist defaulters regain their ability to service loans, will go a long way in reducing the rampant cases where the bankruptcy law has been abused.

Mr Robinson Mirieri, a long-serving banker, says with the advent of Internet and mobile banking, most people who have been declared bankrupt, often start businesses using their spouse’s details or children, “and since the law doesn’t say a bankrupt person cannot touch a computer,” they will continue to transact unless successfully challenged in court.

“The person then takes a back-seat monitoring the adult children run business. Even in court, it is not easy to prove that the business actually belongs to the bankrupt person because the relatives, who he used to start business, are adults and are legally allowed to run their own ventures,” said Mr Mirieri.

The law has been highly abused that certain persons deliberately decided to be bankrupt forever but still run businesses behind the scenes, after taking huge sums of loans from banks or learning they owe creditors millions of shillings, which they can’t pay even after selling a few of the disposable property under their names.

“Some even ask the bank to help them sell their property, to hoodwink the lender that they have demonstrated an aspect of good faith, and that there is nothing left, when they know most of their assets are registered in the relatives’ names.

“If the intention of Insolvency Act is to assist people recover and then settle their debts, I believe it will in a big way, assist in preventing people from hiding behind bankruptcy” Mr Mirieri.

Lawyer Samuel Aduda says firms offering mobile money transfer services, will not know that a person is bankrupt and should, therefore, not be allowed to save a certain amount of money.

A person is only required to produce a copy of the national identity card to register a line with an active mobile money transfer service.

The regulations are not as rigid as when a person is opening a bank account.

Further, the Insolvency Act provides for a public register which is under the custody of the Official Receiver and which can be inspected and accessed by members of the public, including anyone who conducts business with the Bankrupt.

This too faces as challenge as it is not being updated frequently. “The names of the bankrupt persons could be published in the Kenya Gazette but the challenge is that the Gazette is not published so often,” Lawyer Harrison Kinyanjui says.

Mr Kinyanjui believes that implementation of certain sections of the Insolvency Act has also stalled owing to the fact that regulations to steer their implementation have not been taken to Parliament for debate and approval.

His legal counterpart at the State Counsel, Directorate of the Official Receiver, Business Registration Service in the Office of the Attorney General and Department of Justice Ms Beatrice Osicho told Smart Company that some concepts of the Act are still being developed and the regulations are a work in progress.

“The Act is voluminous, we keep identifying provisions that may need regulations. We are working on some regulations as we speak. For instance, the Act now allows us to regulate insolvency practitioners, who previously were unregulated,” said Ms Osicho.

The main controversy surrounding the law has, however, been on implementation, with concerns being raised that it is prone to abuse by persons whose only interest is to avoid meeting their financial obligations.

According to lawyer Mathews Okoth, it is upon the creditor(s) to prove that the economic condition of the person declared bankrupt has changed, for instance by producing his mobile money transfer transactions for a certain period, and therefore apply to the court, to have such a person discharged of the bankruptcy.

Legal challenge

“Enforcing it may be a challenge because information on financial transaction is confidential, but with a court order, the creditors can be allowed to obtain it and legitimately present it as evidence before court,” said Mr Okoth.

Lawyer Boniface Masinde says the challenge would be in proving that the money held by the bankrupt person belongs to him, to warrant discharge of the bankruptcy.

“It is not easy to prove the purpose for which the funds are being held by a bankrupt person because a person may say he is holding the funds on behalf of another, and that the funds were meant to be utilised for funeral or wedding expenses,” says Mr Masinde.

The lawyers now believe that the only practical way of sealing the loopholes would be to place an obligation on the persons declared bankrupt to periodically file returns of their financial transaction in court, as a pre-condition for them to continue enjoying bankruptcy.

Legally though, a bankrupt person who engages in fraud or hides property risks being jailed or made to pay a fine.