Bankruptcy

Bankruptcy, the term applied to the affairs of a person who has been judicially held insolvent. There is a special code of laws applicable to bankruptcy, and a court for their administration known as the "Court of Bankruptcy," which was constituted in the early part of the reign of William IV., but there were bankrupt laws as far back as the reign of Henry VIII.

Bankrupt law has been repeatedly altered, but up to the present time it has not given complete satisfaction in any direction. Formerly traders alone were subject to become bankrupt, but by the last and prevailing statute on the subject, the Bankruptcy Act, 1883, any debtor is brought under its jurisdiction. The following is a summary of the provisions of this important Act.

1. Acts of Bankruptcy. A debtor commits an act of bankruptcy (which is the foundation of the jurisdiction): - (a) If he makes a conveyance or assignment of his property for the benefit of his creditors generally, (b) If he makes a fraudulent conveyance, gift, delivery, or transfer of his property, or of any part of it. (c) If he makes any conveyance or transfer of his property, or any part of it, or creates any charge on it, which would be void as a fraudulent preference if he were adjudged bankrupt, (d) If with intent to defeat or delay his creditors he has left England, or being out of England has remained abroad or otherwise absented himself, or begun to keep house (i.e. been hiding). (c) If execution issued against him has been levied by seizure and sale of his goods under process in any court. (d) If he has filed in the court a declaration admitting his inability to pay his debts, or has presented a bankruptcy petition against himself. (g) If a creditor has obtained a final judgment against him, and execution on it not having been stayed has served on him a bankruptcy notice under the Act requiring him to pay the debt in accordance with the terms of the judgment, or to secure or compound for it to the satisfaction of the creditor or of the court, and he has not within a stipulated time after service of the notice either complied with the requirements of the notice or satisfied the court that he has a counter-claim, set-off, or cross demand equalling or exceeding the amount of the judgment debt, and which he could not set up in the action in which the judgment was obtained; and (h) if the debtor has given notice to any of his creditors that he has suspended or is about to suspend payment of his debts.

2. Petition. Any of the above acts or neglects are sufficient to found a petition for a receiving order, but the act or neglect must have occurred within three months (formerly six months) before the presentation of the petition. The debtor may petition himself, or any single creditor whose debt amounts to £50, or any two or more whose debts in the aggregate amount to that sum. The petition is on oath, and may be filed in the High Court or county court, the choice of court depending on the previous residence and place of business of the debtor.

3. Receiving Order. Upon the hearing of the petition, unless it be dismissed, a receiving order is made and notice thereof transmitted to the official receiver and to the Board of Trade, and it is also advertised. A general meeting of the creditors (known as the first meeting) takes place soon afterwards to consider whether the debtor shall be made a bankrupt or not.

4. Adjudication. The creditors at such meeting or any adjournment thereof may determine that the debtor be adjudged bankrupt, or if no such resolution is passed, or the creditors do not meet, the debtor is adjudged bankrupt, and his property vests in the official receiver. The bankruptcy is deemed to have relation back and to commence at the time of the act of bankruptcy on which a receiving order has been made; or if there be more acts than one, then to have relation back to the first act of bankruptcy proved to have been committed within three months next preceding the presentment of the petition. Certain transactions with the debtor are, however, protected though taking place within the period covered by the relation back. These are (1) any payment by the bankrupt to any of his creditors; (2) any payment or delivery to the bankrupt; (3) any conveyance or assignment by the bankrupt for valuable consideration; and (4) any contract, dealing, or transaction by or with the bankrupt for valuable consideration, provided that the two following conditions be complied with: - (A) The transaction must have taken place before the date of the receiving order; and (B) The person (other than the bankrupt) party to such transaction must not at the time have had notice of any available act of bankruptcy committed before that time. Also as regards executions against the goods or the lands, or against property in the hands of a third party, they are by the Act held good if perfected before the date of the receiving order, and before notice of the presentation of any petition by or against the debtor, and of the commission of any act of bankruptcy by him.

5. Duties of Trustee. Dividends. The trustee's duties consist in realising and distributing the property of the debtor, and he is from time to time to declare dividends amongst the creditors; he is required to pay into such local bank as the committee of inspection shall appoint, or failing such appointment, into the Bank of England all sums from time to time received by him. As regards the payment of dividend, the Act directs that subject to the retention of such sums as may be required for costs of administration, or otherwise, the trustee is to distribute dividends amongst the creditors who have proved their debts, and the first dividend (if any) shall be distributed within four months after the conclusion of the first meeting of creditors, unless the trustee gives sufficient reason to the committee of inspection for postponement; subsequent dividends shall, in the absence of sufficient reason to the contrary, be declared and distributed at intervals of not more than six months. When the trustee has realised all the bankrupt's property, or so much thereof as can, in the opinion of himself and the committee of inspection, be realised without needlessly protracting the trusteeship, he is to declare a final dividend, giving previous notice to the persons whose claims to be creditors have been notified to him, but not established to his satisfaction, that if they do not establish their claims to the satisfaction of the Court under a certain limited time he will proceed to make a final dividend without regard to such claims. If any surplus remains after paying every creditor in full with interest where that is allowed, and after paying all costs of administration, such surplus belongs to the bankrupt.

Dividends are paid rateably among all the creditors without regard to their quality - hence judgments and recognisances and other debts by record or specialty are on the same level with debts by simple contract, and equitable debts rank with legal debts in the same way. But a creditor holding a specific security on part of the bankrupt's property is entitled, notwithstanding the bankruptcy, either to surrender his security and prove for his whole debt, or to realise the security or give credit for its value, and to receive a dividend rateably with the other creditors in respect of the surplus of his debt remaining unpaid. So a landlord distraining for rent after the bankruptcy has occurred may make such distress available to the extent of one year's rent accrued prior to the adjudication, though for the remainder he must come in with the other creditors. A priority is also given to rates and taxes to the extent of one year's assessment, and wages to the extent of £50 in respect of services rendered by clerks or servants, and accrued during four months preceding the date of the receiving order, and also to any labourer or workman to the extent of £25 for services rendered during two months before the receiving order. These must be paid in full and in priority to all others if the estate is sufficient, but they abate if the property is insufficient. With these exceptions all debts provable under the bankruptcy are to be paid pari passu. Unliquidated damages arising on a contract, promise, or breach of trust are not provable in bankruptcy.

6. Statement of Affairs. Committee of Inspection. Within seven days from the date of the receiving order, if on a creditor's petition, and within three days if on the debtor's own petition, the debtor is to submit to the official receiver a statement of his affairs, and as soon as possible after such receiving order has been advertised the official receiver summons a general meeting, called the first meeting of the creditors, of which seven days' notice is given in the London Gazette, and in a local paper, and he transmits to the creditors mentioned in the statement of affairs a summary of such statement, and at such meeting the creditors, if they have first resolved that the debtor shall be made bankrupt, appoint some creditor, or other proper person, to fill the office of trustee of the bankrupt's property, and they appoint from the creditors proper persons (not less than three in number, nor more than five) as a committee of inspection, to superintend the administration of the bankrupt's estate. The first meeting is usually presided over by the official receiver, or his nominee, in whom the property vests from the date of the receiving order, until some one else is appointed. Debts can be proved at this or any other meeting, and no person can vote either at the first or any subsequent meeting till he has proved his debt in the prescribed form.

7. Management of Estate. It is the duty of the creditors' trustee to use his best exertions in the management of the estate up to the close of the bankruptcy, and until the bankrupt has obtained his discharge. For this purpose he calls meetings of the creditors to ascertain their wishes, and, if necessary, he applies to the court for directions relating to any special matter occurring. He should also, as the bankruptcy proceeds, consult the committee of inspection as to his proceedings, and he has power by the Act to sell all or any part of the property by public auction or private contract; to give receipts for purchase moneys, which effectually discharge the purchaser; to prove, rank, claim, and draw a dividend in respect of any debt due to the bankrupt; to exercise any trustee powers under the Act, and to execute powers of attorney, deeds, and other instruments, for the purpose of carrying into effect the provisions of the Act, and to deal with any property in which the bankrupt is beneficially entitled as tenant in tail, in the same manner as the bankrupt might.

He may also, with the consent of the committee of inspection, carry on the business of the bankrupt so far as necessary for winding up; bring or defend actions, or other legal proceedings relating to the property, and compromise same. He may also employ the bankrupt to superintend the management of the property, making an allowance to him for his support, or in consideration of his services.

8. Examination of Bankrupt. The court, at the expiration of the time for the filing of the statement of affairs, holds a sitting for the bankrupt's examination (called his "public examination") and notice is given by advertisement in the London Gazette and a local paper; any other examination by the court is usually before a Registrar at chambers. The court has power to adjourn from time to time, and it is the duty of the bankrupt to answer all questions put to him by the court or any creditor. A note of the examination is signed by the bankrupt, and is open to the inspection of creditors, and may be used against him in evidence. The court, when satisfied of the completeness of the investigation, makes an order declaring that his "public examination" is concluded, but this order cannot be made until after the day appointed for the first meeting.

A bankrupt is subject to prosecution, as for a misdemeanour, if he fail to disclose the whole of his estate, or to deliver up all property in his control, also all books; if he conceals or removes any part of his property, or makes a material omission in the statement of his affairs, or mutilates or falsifies any book or document relating to his affairs.

9. Order of Discharge. At any time after the adjudication the bankrupt may apply to the court for an order of discharge, and this application is heard in open court as soon as his public examination is finished; and the court may grant an absolute order of discharge, which releases him from all liabilities provable under the bankruptcy, except only those incurred by fraud, or fraudulent breach of trust, or such as are due to the Crown, or incurred for some offence against the revenue laws, or as estreated bail for any person charged with such offence, and the bankrupt is thereupon entitled to all future acquisition of property. The court may, however, refuse an absolute order of discharge, and may suspend the same for a specified time on certain conditions, and the court is bound to refuse his discharge in all cases where he has been guilty of a misdemeanour of the class specified. The principal other grounds of refusing or suspending his order of discharge are: 1, that he has not kept proper books of account; 2, that he has continued to trade after knowing he was insolvent; 3, that he has contracted debt without reasonable expectation of being able to pay; 4, rash and hazardous speculation; 5, the putting any of his creditors to expense by vexatiously defending any action properly brought against him; 6, undue preference of any particular creditor; 7, previous bankruptcy or arrangement with creditors; 8, fraud or breach of trust. Formerly, and under previous statutes, the order of discharge was dependent upon the bankrupt paying a dividend of not less than 10s. in the (except under special circumstances). It is not so now.

In Scotland "Sequestration" is analogous to bankruptcy in England, and the rules and procedure are pretty nearly the same; but there is no Court for their administration. The sheriffs of counties award sequestration, a judicial factor is thereupon (if necessary) appointed, and acts until the appointment of a trustee, and the creditors nominate commissioners to advise with him in the administration of the estate.

In the United States each State can regulate its Bankruptcy and Insolvency Law subject to the paramount jurisdiction conferred on Congress by the Constitution. There are several Federal statutes dealing with the general doctrines of bankruptcy, bankruptcy offences, and the constitution of Bankruptcy Courts, the last of which was passed in the year 1878.