Prejudicial Dispositions: Remedies Available To Creditors As A Result Of Prejudicial Dispositions By Debtors

This refers to a disposition of land either by sale, charge, transfer, partition, exchange, assignment, surrender or a lease by a debtor who is unable to pay its creditors in an attempt to delay or defeat the exercise by his creditors of any right of recourse to that land.

Rampant cases on disposition of interest in land by debtors to defeat creditors has seen parliament enact laws to address such grievances. Legal provisions on dispositions prejudicial to creditors is provided in the Land Registration Act, 2012 (the “Act”). Section 51(1) of the Act provides that a disposition under the Act is deemed to prejudice a creditor if:

• the person making the disposition is unable to pay all their debts without recourse to that private land or any interest in it; and
• the disposition hinders, delays or defeats or is intended to hinder, delay or defeat the exercise by a creditor of any right of recourse to land or any interest in land in respect of which that disposition has been made in order to satisfy in whole or in part any debt owed to the creditor by the person making the disposition.

The above notwithstanding, if a debtor makes a disposition with the intention of preferring one creditor over another, such a disposition is not prejudicial.

This article seeks to shed light on the remedies available to creditors whose right to recourse to the land is defeated by the debtor disposing the property.

As stated above, a debtor cannot escape liability by disposing land to the detriment of its creditors. The provisions of the Act allow a creditor to seek the intervention of the Court for an order to set aside a prejudicial disposition or receive compensation as long as the creditor can demonstrate that the sale falls within the ambit of prejudicial disposition as defined in the Act.

Upon hearing the creditor’s application, the Court may order any person who acquired or received land under that disposition to pay compensation to the applicant or to re-assign a right of occupancy or a derivative right to the person who made the prejudicial disposition. In addition, the Court may order the person who made the prejudicial disposition to hold land restored to him through re-assignment as stated above or to hold the land as a trustee for the benefit of the creditors.

Courts have affirmed this position as seen in the case of Alfred Kimani Njoroge vs. Peter Njuguna Kamau & 5 others [2014] eKLR, the Plaintiff had obtained orders against the 1^st Defendant’s interest in property pending the verification of the 1^st Defendant’s share in the subject property to allow the same be attached and sold in satisfaction of the decree in favor of the Plaintiff. Contrary to the said orders, the 1^st Defendant went ahead and transferred the subject property to the 1^st and 2^nd Interested Parties. The Plaintiff subsequently filed an application on the grounds that the disposition was prejudicial. The Court allowed the Plaintiff’s application and ordered that the registration of the 1^st and 2^nd Interested Parties as owners of the subject property be nullified and ownership reverted back to the 1^st Defendant to enable the Plaintiff proceed with his execution process in satisfaction of the decree.

The foregoing notwithstanding, the Court will not make an order for restoration or compensation against a person who acquired or received the land in good faith. In addition, the bona fide purchaser has to prove that he/she did not have knowledge of the creditor’s claim.

Reference to knowledge as stated above has to be actual, constructive and imputed knowledge.

In conclusion, it is incumbent on buyers or financiers to conduct thorough due diligence on registered owners proposing to charge or sale their land to avoid instances where they have to relinquish the property or compensate the persons affected.