Debt recovery is a critical aspect of financial management, ensuring that creditors can reclaim funds owed to them. In Kenya, the debt recovery process is governed by a robust legal framework designed to balance the interests of both creditors and debtors. This guide provides a detailed overview of the debt recovery process in Kenya, including the legal procedures, strategies, and considerations involved.
1. Understanding Debt Recovery
Debt recovery involves pursuing payments of debts owed by individuals or businesses. This process can be initiated through various means, including amicable settlements, debt collection agencies, and legal action through the courts.
2. Legal Framework Governing Debt Recovery
Kenya has several laws that govern debt recovery, including:
- The Civil Procedure Act: Outlines the legal procedures for pursuing debt recovery through the court system, including filing lawsuits and enforcing judgments.
- The Law of Contract Act: Establishes the legal basis for enforceable agreements and debt obligations.
- The Limitation of Actions Act: Sets time limits within which creditors can initiate legal action for debt recovery, typically six years from when the debt became due.
- The Debt (Summary Recovery) Act: It provides the procedure for recovering civil debts in Kenya.
- The Auctioneer’s Act: It regulates the operations of debt collection agencies and auctioneers, during debt recovery ensuring ethical practices.
3. Debt Recovery Process
The debt recovery process in Kenya can be divided into three main stages: pre-legal, legal, and enforcement of judgment.
- a. Pre-Legal Process: The pre-legal process entails the following: –
- Issuance of a Demand Letter: The process begins with sending a formal demand letter to the debtor, requesting payment of the outstanding amount within a specified timeframe. This letter serves as a critical reminder and is often required as part of court documents if legal action becomes necessary
- Negotiation and Mediation: If the debtor responds, negotiations may occur to discuss suitable repayment options. This step can help preserve relationships while seeking an amicable resolution
- b. Legal Process: If the debtor fails to respond or refuses to pay, creditors may proceed with legal action:
- Filing a Lawsuit: Creditors must file a suit in a court of competent jurisdiction based on the amount owed:
- Small Claims Court for debts below Kshs. 1 million.
- Magistrate’s Court for debts between Kshs. 1 million and Kshs. 20 million.
- High Court for debts exceeding Kshs. 20 million.
- Serving the Summons: The debtor (defendant) is served with a court summons to respond to the claim.
- Hearing and Judgment: The court hears the case and delivers a judgment.
- Obtaining a judgment: After hearing the case, if the court finds in favor of the creditor, it issues a judgment specifying the amount owed by the debtor.
- Filing a Lawsuit: Creditors must file a suit in a court of competent jurisdiction based on the amount owed:
- c. Enforcement of court judgment: If the court rules in favor of the creditor and the debtor still refuse to pay, the creditor can take further steps to enforce the judgment, including:
- Extracting a Decree: The creditor must extract a decree from the court, which formally demands payment from the debtor.
- Enforcement of the Decree: If payment is not made within the specified timeframe, creditors can pursue various enforcement methods:
- Attachment of Assets: Auctioneers may be instructed to attach and sell the debtor’s property.
- Garnishee Proceedings: Creditors can obtain garnishee orders where debtors’ bank accounts are known. Garnishee orders and directs the bank or a third party holding the debtor’s money to remit the debtor’s funds directly to the creditor. It is effective for liquid assets and funds held by third parties.
- Other Execution processes available to the decree-holder are prescribed under Order 22 of the Civil Procedure Rules 2020. Such modes include applying for an order of examination of a judgment debtor as to his property, attachment of agricultural produce, attachment of salary, attachment of partnership property, and applying for a notice to show cause why the judgment debtor should not be arrested, amongst others.
- Recovery under the Movable Property Security Rights Act, 2017: The Movable Property, Security Rights Act, was enacted in 2017 to facilitate the use of movable property as collateral for credit facilities. A security right is created by executing a security agreement provided that the grantor has rights in the asset to be encumbered. Where there is a default of any secured obligation, the secured creditor shall serve upon the grantor a written notification to make good the debt owed or to perform any other obligation. Where the grantor fails to comply with the demand, the grantor may proceed to recover the debt owed as set out under section 67(3) of the Movable Security Rights Act, 2017, through any of the following modes: suing the grantor, appointing a receiver of the movable asset, leasing the movable asset, taking possession and selling the movable asset.
4. Best Practices for Successful Debt Recovery
To improve recovery outcomes, creditors should consider implementing the best practices:
- Maintain Clear Documentation: Keeping detailed records of agreements and communications strengthens cases in court.
- Engage Professional Collection Agencies: Utilizing registered agencies can enhance recovery rates due to their expertise in navigating legal systems.
- Early Intervention: Addressing delinquent payments promptly increases the chances of resolution without legal action.
When choosing a debt collection agency, consider factors such as registration and licensing, reputation, transparency, and ethical practices.
5. Challenges in Debt Recovery
Despite having structured processes, several challenges can hinder effective debt recovery in Kenya, including:
- Non-Disclosure of Assets: Debtors may hide or transfer assets to evade recovery.
- Prolonged Legal Processes: Court cases can be lengthy, delaying resolution.
- High Costs: Litigation and enforcement expenses can be substantial.
- Debtors Declared Insolvent: Recovery becomes difficult if a debtor is declared bankrupt or insolvent.
Conclusion
The debt recovery process in Kenya is well-defined, offering creditors various legal and practical tools to reclaim debts. However, successful recovery requires a strategic approach, timely action, and adherence to legal procedures. Engaging experienced legal professionals ensures creditors navigate the process effectively, protecting their interests while complying with the law.
Whether you’re an individual or a business, understanding the debt recovery landscape in Kenya is crucial for safeguarding your financial health.
At Njaga & Co. Advocates, we specialize in providing effective debt recovery solutions tailored to our clients’ unique needs. From issuing demand letters, negotiating settlements, litigating claims, and enforcing court judgments, our experienced team ensures every step is handled professionally and efficiently. We also offer alternative dispute resolution options, asset tracing, and expert advice to maximize recovery efforts. Trust us to safeguard your interests and deliver results in the most cost-effective and timely manner.
