NO ASSET PROCEDURE

Background

Individuals or debtors who cannot pay their debts may petition for no asset procedure under
the Insolvency Act. If the debtor has no assets to satisfy the obligations, they may be declared
bankrupt and the creditors notified that there are no assets to share among them. This is
known as a "no asset" situation and the insolvency process that such a debtor can subscribe to
is what is referred to as a no-asset procedure.1

The procedure avails in favour of the debtor only if the Official Receiver is satisfied on
reasonable grounds that; the applicant has no realisable assets, he has not previously been
admitted to the no-asset procedure, he has not previously been adjudged bankrupt, he has
total debts that are not less than one hundred thousand shillings and not more than four
million shillings, and he does not have the means to repay any amount towards those debts. 2
A creditor of a debtor may not, after the debtor has been admitted to the no-asset procedure,
begin or continue any step to recover or enforce a debt however the following debts remain
enforceable; amounts payable under a court order made under the Matrimonial Causes Act
(Cap. 152), amounts payable under the Children Act (Cap. 8) or amounts owed in respect of a
loan to secure the education of a dependent child or step-child of the debtor.

Section 348(1) prohibits an insolvent debtor who submitted an application for entry into the
no-asset procedure under the Act from obtaining credit including a credit purchase
transaction of more than ten thousand shillings without first notifying the credit provider that
he or she has applied for entry into the no-asset procedure and a violation of this restriction is
an offence for which the debtor is subject to the penalties specified in paragraph (2). 3 The
debtor is also prohibited from obtaining credit, either alone or jointly with another person, of
more than one hundred thousand shillings without first informing the credit provider that the
debtor is subject to the no-asset procedure.4

Section 352 imposes special obligations on a debtor under the no-asset procedure. For
example, if the Official Receiver requests it, the debtor is obligated under paragraph (1) to
give him with such assistance, papers, and any other material information as are reasonably

1 The Insolvency Act, s 14(d)

2 The Insolvency Act, 2015 s 345(1).
3 The Insolvency Act, 2015 s 348.
4 The Insolvency Act, 2015 s 352(3).
required to administer the no-asset procedure properly. It is also important to note that the
right to apply for admission to the no-asset procedure is not absolute. The Act provides that
the Official Receiver shall not admit a debtor to the no-asset procedure if satisfied (on
reasonable grounds) that; the debtor has concealed assets intending to defraud his creditors,
he has engaged in conduct that constitutes an offence under the 2015 Act if he were adjudged
bankrupt, he has incurred a debt or debts knowing that he does not have the means to repay
them or a creditor intends to apply for the debtor to be adjudged bankrupt and it is likely that,
if he were to be adjudged bankrupt, the outcome for the creditor would be materially better
than if the debtor were admitted to the no-asset procedure.5

The Official Receiver is bound to terminate the debtor’s participation in a no-asset procedure
with notice to the debtor and his creditors if he is satisfied that; the debtor was wrongly
admitted to the procedure or that his financial circumstances have changed sufficiently to
enable him to repay an amount towards his debts. 6 The effect of termination of the no-asset
procedure is to render all debts in respect of which the debtor was shielded enforceable in
bankruptcy or other civil proceedings together with penalties (if any) and interest accrued on
such debts.7 According to section 359, subsection (1), a debtor who is participating in the no-
asset procedure is automatically discharged from that procedure at the end of twelve months
after the date when he was admitted to it unless that period is extended or deferred by notice
per subsections (2), (3) and (4).8

On discharge under section 359, the debtor’s debts that became unenforceable at the time of
admission to the non-asset procedure are cancelled and, consequently, he is no longer liable
to pay any part of the debts, including any penalties and interest that may have accrued. 9
However, this reprieve does not apply to; any debt or liability incurred by fraud or fraudulent
breach of trust to which the debtor was a party or any debt or liability for which the debtor
has obtained forbearance through fraud to which he was a party. 10 This was the position
reiterated in the case of Abinel Ariga Ogamba v People Limited & another [2021] eKLR. The
court was faced with an application to quash warrants of arrest that were issued to the 2nd
Respondent after failing to satisfy a decree that was issued against him claiming that he had
been admitted to the no-asset procedure. The court observed that the 2nd Respondent was
5 The Insolvency Act, 2015 s 346.
6 The Insolvency Act, 2015 s 355(1).
7 KI Laibuta, Principles of Commercial Law (2nd edn, LawAfrica 2006) 571.
8 The Insolvency Act, 2015 s 359.
9 The Insolvency Act, 2015 s 360(1).
10The Insolvency Act, 2015 s 360(2).
discharged from the no-asset procedure under Section 359(1) since the timeframe had expired
(exceeded 12 months from admission) which directly implied that the proviso of Section
360(1) would apply and hence the 2nd Respondent’s listed debts would remain
unenforceable.11

Challenges and Considerations

Limited Debt Recovery: The main issue with the no-asset process is that creditors may have
trouble collecting on their obligations. If an insolvent debtor has no substantial assets, there
may not be enough money to distribute to creditors. This might lead to little or no payments,
leaving creditors with few options for recouping their losses.

Moral Hazard: The accessibility of a simplified approach with no serious penalties or

wholesome debt payback requirements may generate a moral hazard. Individuals in financial
difficulty may be encouraged to misuse the system by purposefully shifting assets, increasing
debt, or abusing the system to avoid fulfilling their debts.

Lack of Deterrence: There is no disincentive mechanism for individuals to operate

responsibly and sensibly under the no-asset system. Knowing that the repercussions for
financial mismanagement or excessive debt will be minor, individuals may engage in
hazardous behaviour, leading to greater insolvencies and possible pressures on the economy
by establishing a climate of investor and creditor mistrust.

Inadequate Rehabilitation Support: Insolvency rules should support debtor rehabilitation and
reintegration into the economic system as well as creditor recovery. The no-asset approach,
on the other hand, lacks procedures or resources to assist debtors in restructuring their
finances, gaining financial literacy, or adopting sustainable company practices.

Benefits

Simplified Process: Individuals with little assets and limited income who are unable to repay
their obligations generally benefit from the no-asset procedure, which simplifies and
expedites the process. It removes the need for sophisticated asset appraisal and distribution,
lowering administrative burdens and expenses for both debtors and the bankruptcy system.

11 Abinel Ariga Ogamba v People Limited & another [2021] eKLR

Debt Discharge: One of the primary advantages of the no-asset method is that it permits some
debts to be discharged without forcing a debtor to make hefty repayments. This gives
financially distressed people a fresh start if they have no realistic way of repaying their
obligations.

Financial Rehabilitation: Debtors who use the no-asset method are able to repair their
finances and recover control of their financial condition. Debtors may focus on regaining
their financial stability, controlling their income, and making educated financial decisions
when their debts are discharged and they are relieved of burdensome financial commitments.

Protection from Creditor Harassment: Debtors who use the no-asset method are usually
legally protected against creditor harassment, including collection calls, legal proceedings,
and threats. This alleviation reduces tension and allows debtors to focus on fixing their
financial problems and moving forward.

Equality of Treatment: Individuals facing insolvency are treated equally under the no-asset
approach. By providing a streamlined approach, debtors with minimal assets and income are
spared from being subjected to the equivalent rigorous and expensive bankruptcy proceedings
as debtors with large assets.

Comparative Analysis

i) The United States

The United States of America (USA) has a similar though different process involved
altogether to the no-asset procedure in Kenya. The provisions are covered under Chapter 7 of
the Bankruptcy Code under the title Liquidation however, it does not specifically refer to a
"no-asset procedure," it contains provisions for the administration of no-asset cases.

The USA commences a bankruptcy case by creating an “estate” which technically becomes
the temporary legal owner of all the debtor’s property. 12 It consists of all legal or equitable
interests of the debtor in property as of the commencement of the case, including property
owned or held by another person if the debtor has an interest in the property. 13 Property is

12 Bankruptcy Judges Division, Bankruptcy BASICS (Administrative Office of the United States Court,
November 2011 Revised Third Edition) <https://www.uscourts.gov/sites/default/files/bankbasics-
post10172005.pdf> accessed on 23 June 2023
classified under exempt and nonexempt property and therefore, the debtor’s creditors are paid
from the nonexempt property of the estate.

Once a no-asset petition is filed, the U.S. Trustee (or, in Alabama and North Carolina, the
bankruptcy court) appoints an impartial case trustee to handle the case and liquidate the
debtor's nonexempt properties.14 If all of the debtor's property is exempt or subject to lawful
liens, the trustee will usually submit a "no asset" report with the court, and no distribution
will be made to unsecured creditors.15

There is no requirement for creditors to file proofs of claim in a no-asset case because there
would be no distribution.16 If the trustee afterwards recovers assets for distribution to
unsecured creditors, the Bankruptcy Court will notify creditors and provide them further time
to file proofs of claim although a secured creditor in a no-asset case is not required to file a
proof of claim in order to keep its security interest.17

The no-assets debtors are awarded a discharge which releases individual debtors from
personal liability for most debts and prevents the creditors owed those debts from taking any
collection actions against the debtor.18 The court may deny the debtor a discharge if it finds
that the debtor: failed to keep or produce adequate books or financial records, failed to
explain satisfactorily any loss of assets, committed a bankruptcy crime such as perjury, failed
to obey a lawful order of the bankruptcy court, fraudulently transferred, concealed, or
destroyed property that would have become the property of the estate or failed to complete an
approved instructional course concerning financial management.19

Not all of an individual’s debts are discharged in Chapter 7. Debts not discharged include
debts for alimony and child support, certain taxes, debts for certain educational benefits,
overpayments or loans made or guaranteed by a governmental unit, debts for willful and
malicious injury by the debtor to another entity or to the property of another entity, debts for
13 Bankruptcy Judges Division, Bankruptcy BASICS (Administrative Office of the United States Court,
November 2011 Revised Third Edition) <https://www.uscourts.gov/sites/default/files/bankbasics-
post10172005.pdf> accessed on 23 June 2023
14 United States Code Title 11, § 701.
15 United States Code Title 11, § 704.
16 United States Code Title 11 § 502(b)
17 Bankruptcy Judges Division, Bankruptcy BASICS (Administrative Office of the United States Court,
November 2011 Revised Third Edition) <https://www.uscourts.gov/sites/default/files/bankbasics-
post10172005.pdf> accessed on 23 June 2023
18 Bankruptcy Judges Division, Bankruptcy BASICS (Administrative Office of the United States Court,
November 2011 Revised Third Edition) <https://www.uscourts.gov/sites/default/files/bankbasics-
post10172005.pdf> accessed on 23 June 202
19 United States Code Title 11 § 727(b)
death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor
was intoxicated from alcohol or other substances, and debts for certain criminal restitution
orders.20

The court may revoke a Chapter 7 discharge on the request of the trustee, a creditor, or the
U.S. trustee if the discharge was obtained through fraud by the debtor if the debtor acquired
property that is property of the estate and knowingly and fraudulently failed to report the
acquisition of such property or to surrender the property to the trustee, or if the debtor
(without a satisfactory explanation) makes a material misstatement or fails to provide
documents or other information in connection with an audit of the debtor’s case.21

ii) Analysis

From these provisions, one can therefore establish that the US legal framework does not
specifically refer to a "no-asset procedure," it contains provisions for the administration of
no-asset cases when a debtor has no assets to satisfy the obligations. Secondly, US law does
not limit the period for one to be protected from creditors and actions for collection of debts.
The discharge will last until it is revoked by a court of law as per the grounds set out in
United States Code Title 11 §727(d).

Unlike Kenya, US law does accommodate unsecured creditors. The Kenyan position is that
debts that became unenforceable at the time of admission to the non-asset procedure are
cancelled. Based on this provision, unsecured creditors stand to lose under the Kenyan
system because unsecured loans are generally considered unenforceable and will not be
recognised during admission to no asset procedure as was observed in Abinel Ariga Ogamba
v People Limited & another. Under US law secured and unsecured creditors have an equal
opportunity to file for a proof of claim to adduce evidence to prove the existence of such
debts and if successful they become recognised as a creditor to the estate. The Kenyan system
has a shortcoming in this area as a lack of wholesome debt payback requirements may
generate a moral hazard allowing deceitful individuals to manipulate the system to their
advantage at the detriment of unsecured creditors.

20 United States Code Title 11 § 523(a)

21 United States Code Title 11 §727(d).