Where the debtor enters an appearance, the petition is set down for hearing in Chambers before a Judge. Sections 34 to 38 of the Insolvency Act (Chapter 253) govern what happens next.
Sections 34 and 35 — the hearing
34. A debtor intending to show cause against a petition may file in the Registry any affidavit intended to be used for that purpose.
35(1). Where the debtor appears, the Court shall require proof of (a) the debt of the petitioning creditor, and (b) an act of insolvency alleged in the petition — and if satisfied with the proof shall adjudge the debtor to be insolvent.
35(2). The Court may (a) adjourn the petition, conditionally or unconditionally, for the procurement of further evidence or for any other just cause; or (b) dismiss the petition, with or without costs, as it thinks just.
The debt and the act of insolvency. The verifying affidavit under section 29 is prima facie evidence of both, so in practice the debtor’s section 34 affidavit is what puts them in issue.
Note the word shall in section 35(1): once the Court is satisfied of both, adjudication follows. The discretion is in subsection (2) — to adjourn, or to dismiss where the proof falls short.
Remember also section 22: an act of insolvency more than six months before the presentation of the petition cannot support an adjudication, however clearly it is proved.
Section 36 — where the debt is denied
Where the debtor appears and denies (a) that he is indebted to the petitioner, or (b) that he is indebted in an amount justifying the petition, the Court may — on such security as it requires for payment of (c) any debt that may be established in due course of law and (d) the costs of establishing the debt — stay all proceedings on the petition for such time as is required for the trial of the question relating to the debt.
That trial is before the Court or a Judge, or some other court with jurisdiction to determine questions relating to debts of the same amount.
Where proceedings are stayed, and the Court thinks it just to do so by reason of the delay caused by the stay or for any other cause, the Court (c) may adjudge the debtor insolvent on the petition of some other creditor, and (d) shall then dismiss the stayed proceedings on such terms as it thinks just.
So a debtor who defeats one petitioning creditor by disputing the debt does not thereby buy time against everyone else. A second creditor’s petition can proceed while the first is stayed.
The provision mirrors section 24(2)(b), which allows the same stay-on-security where a debtor’s summons is challenged. In both, the debtor must put up security — disputing the debt is not free.
Section 37 — who pays for the petition
(1) The petitioning creditor shall defray the costs and expenses of all proceedings in the insolvency until, and inclusive of, the order of adjudication.
(2) When taxed, those costs and expenses shall be repaid to the petitioning creditor out of the first moneys received from the estate.
The petitioning creditor funds the process and is reimbursed first from realisations. The same principle appears in the corporate scheme: under Schedule 9 section 1(b) of the Companies Act, the reasonable costs of the person who applied for the liquidation rank in the first tier of priority.
Section 38 — the forfeiture rule
Where, after the presentation of a petition, the debtor (a) pays money to the petitioning creditor, or (b) gives or delivers, or procures to be given or delivered, any satisfaction or security for his debt, so that the petitioning creditor receives a greater percentage of his debt than the other creditors —
the petitioning creditor (c) forfeits his whole debt; and (d) shall repay or deliver up the money, satisfaction or security, or the full value of it, to the trustee.
Not merely repayment — forfeiture of the whole debt. A petitioning creditor who accepts a quiet payment to withdraw the petition loses everything and must hand back what was received.
The rationale is that the petition is presented for the benefit of creditors generally. Once it is on foot, the petitioning creditor is acting for all of them, and cannot sell that position for private advantage.
The same conduct is also an act of insolvency by the debtor under section 21(1)(f) — and, on the corporate side, would be a voidable transaction under section 340 of the Companies Act. The right course for a debtor who can pay is to satisfy the debt before the petition is presented.
Sections 40 to 42 — examinations before adjudication
Before adjudication the Court may (a) summon the debtor or any person it thinks capable of giving information concerning an act of insolvency to attend before it — or, outside the National Capital District and the Central Province, before a magistrate; and (b) require him to produce books or documents in his possession or control.
The examining magistrate may (a) examine the person summoned; and (b) where the person fails without reasonable excuse to attend, (i) order by warrant that he be arrested and brought before him for examination, or (ii) order the seizure of all or any of the books or documents he was ordered to produce — or both.
Under section 42, failing without reasonable excuse to attend is an offence: a fine not exceeding K200.00 or imprisonment for up to six months, or both.
Section 40 lets a petitioning creditor obtain evidence of an act of insolvency before adjudication — important where the act alleged is a concealed transfer or a fraudulent preference, which the debtor is unlikely to admit.
After adjudication the trustee has the much wider powers in sections 83 to 89, including examination on oath about the debtor’s property and dealings, and the abrogation of the privilege against self-incrimination in section 85.
Sources
- Insolvency Act (Chapter 253) — ss 21, 22, 24, 29, 34–42, 83–89
- Companies Act 1997 — s 340; Schedule 9
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.