Volume 3, Part 1, Slice 2 Part 43 (1/2)

[Sidenote: Inquiry of 1906.]

It would be out of place in this article to attempt to answer the question how far later legislation has solved the difficult problems which prior to 1883 were found so intractable, but it may be mentioned that in 1906 the Board of Trade appointed a committee to inquire into and report upon the effect of the provisions of the laws in force at the time in the United Kingdom in relation to bankruptcy, deeds of arrangement and composition by insolvent debtors with their creditors, and the prevention and punishment of frauds by debtors on their creditors, and any points and matters upon which the existing laws seemed to require amendment. The committee received a vast amount of evidence as well as doc.u.ments and memoranda from chambers of commerce, trade protection societies and influential public bodies. The scope of the inquiry was not limited to English law and procedure, but also embraced that of Germany, France, Australia, Scotland and Ireland. The report of the committee was issued in 1908 (Cd. 4068), and reference may be made to it for much valuable information. The committee reported that the result of their inquiry did not disclose any dissatisfaction on the part of the commercial community with the main features of the existing law and procedure. But there were certain special incidents of the law and branches of its administration upon which the committee made recommendations. One was the prosecution and punishment of debtors who had committed fraud on their creditors or caused loss to them by improper and reckless trading.

The existing procedure was complained of as being dilatory, c.u.mbersome and expensive, and the committee were of an opinion that where a debtor had committed an offence for which he could and ought to be prosecuted, prosecution and conviction, with adequate punishment, ought to follow speedily and decisively, and the chief recommendation of the committee was that, while the existing procedure should be left untouched, offences ought also to be punishable on summary conviction before magistrates and justices, and the provisions of the Summary Jurisdiction Acts applied to them, and that where an order for a prosecution is made on an application by the official receiver of a bankruptcy court and based on his report, that court should have power to order the official receiver to conduct the prosecution before the court of summary jurisdiction. The committee also reported that numerous delinquencies by insolvent debtors in the conduct of their affairs, or which had contributed to the losses sustained by their creditors, were not punishable or even cognizable by courts having bankruptcy jurisdiction unless or until a debtor who had a receiving order against him, or became a bankrupt, applied for an order sanctioning a composition or scheme of arrangement with his creditors, or for an order discharging him from his debts. The most prominent of these delinquencies which were brought to the notice of the committee were--failure by a debtor to keep any books or any proper or adequate books of account in his business; trading with knowledge of insolvency; gambling and speculation leading to, or contributing to, the debtor's insolvency or bankruptcy; failure properly to account for any substantial deficiency of a.s.sets. The committee received a large body of evidence in favour of making delinquencies such as have been described punishable by imprisonment.

Evidence was also given as to the laws in force in Germany, France and Scotland, from which it appeared that such delinquencies, especially that of keeping no books of account, can be severely dealt with as criminal offences.

After carefully weighing the evidence on both sides the committee recommended that the failure or omission by a debtor who becomes bankrupt to have kept any books of account, or proper books of account, within two years next preceding his bankruptcy, in a trade or business carried on by him, if without excuse, should be made by law an offence punishable on summary conviction by imprisonment, subject to four important limitations, namely, that the law should define what books of account a person carrying on a trade or business must keep, following in this respect the law in force in France and Germany; that failure or omission by a debtor to have kept the required books should only be punishable in the event of a debtor becoming bankrupt and of the liquidated debts proved in the bankruptcy exceeding 200 in amount; that no prosecution of a debtor for failure or omission to keep books of account should take place before the lapse of two years from the pa.s.sing of the law; that a debtor should not be punished if he could show that his failure or omission to keep proper books was honest and excusable and did not contribute to his insolvency, and that no prosecution should be inst.i.tuted for the offence except by order of the bankruptcy court. The committee made recommendations of much the same character with regard to punis.h.i.+ng some of the other delinquencies mentioned above. There were also recommendations by the committee as to trading by undischarged bankrupts, as to the realization of estate on bankruptcy, as to the operation of the law of relation back of a bankruptcy trustee's t.i.tle, as to the law relating to the after-acquired property of an undischarged bankrupt, and dealings with such property, and with respect to married women and their liabilities under bankruptcy law. The committee also reported on the law and practice relating to voluntary deeds of arrangement between a debtor and his creditors and on the compulsory regulation of a.s.signments of book debts, and of agreements for the hire and purchase of chattels.

[Sidenote: Results of legislation.]

In addition to this report the annual reports of the Board of Trade, which are accompanied by elaborate tables of statistics, and by copious ill.u.s.trations both of the working of the system and of the characteristic features and causes of current insolvency, are published as parliamentary papers, and may be usefully consulted by those interested in the subject.

It appears from these reports that the total number of insolvencies dealt with under the bankruptcy acts during the ten years ending 31st December 1905, was 43,141, involving estimated liabilities amounting to 61,685,678, and estimated a.s.sets amounting to 26,001,417. It may also be pointed out that according to the official figures, the cost of bankruptcy administration under the present system has very considerably decreased as compared with that under the act of 1869. Estates are also closed at much shorter intervals, and, what is more important from a public point of view, it appears [v.03 p.0325] that while the estimated liabilities of bankrupt estates during the ten years ending 1883 amounted on an average to 22,380,000 per annum, the estimated liabilities during the ten years ending 1905 only averaged 6,168,567 per annum. But during the latter period there was an annual average of 3426 private arrangements involving a further estimated annual liability of 4,166,354 entered into outside of the Bankruptcy Acts by insolvent debtors. There are no means of ascertaining the corresponding amount of liabilities on private arrangements outside of the Bankruptcy Acts prior to 1883, and therefore a complete comparison is impossible; but it is evident that on any method of computation there has been a very great diminution in the trading insolvency of England and Wales, while it is also clear as a matter of general knowledge in commercial circles, that a great decrease in the proportion of fraudulent trade and reckless speculation has been a marked feature of private trading during the period in question.

The cost of bankruptcy administration is provided for: (1) by fees charged to bankrupt estates, (2) by interest on balances at the credit of such estates with the bankruptcy estates account, and (3) by interest on unclaimed funds at the credit of estates under former Bankruptcy Acts.

Out of this are paid the salaries of all the officers of the department, including the official receivers; the remuneration due in respect of bankruptcy services to the county court registrars; pensions, &c., payable to retired officers under the present and previous Bankruptcy Acts; cost of bankruptcy prosecutions; and rents, stationery, travelling and other incidental expenses. The system is self-supporting and involves no charge upon the tax-payers of the country. It has been objected that inasmuch as the act professes to be based on the principle of enforcing commercial morality in the interests of the general community, the cost of administering it should not be charged entirely to the bankruptcy estates concerned. But when it is considered that a large part of the revenue of the department is derived from funds to which estates administered under the present act have contributed nothing, this objection does not appear to be well founded.

[Sidenote: Summary of procedure.]

For the convenience of readers who may require more detailed information, the accompanying summary of some of the more important provisions of the law relating to bankruptcy procedure is submitted. It must be borne in mind, however, that the subject is in some of its branches extremely intricate, and that both the law and the procedure are being constantly affected by a considerable body of judicial interpretation, while the acts also contain detailed provisions with regard to many questions incident to the administration of bankruptcy. A reference to the latest textbooks or competent professional advice will always be advisable for those who have the misfortune to be practically interested either as debtors or as creditors in bankruptcy proceedings.

[Sidenote: Deeds of arrangement.]

The Deeds of Arrangement Act 1887, although not falling strictly within the scope of the bankruptcy law, may also, in consequence of its important bearing upon the question of insolvency in England and Wales, be here noticed. It has been pointed out that, under the Bankruptcy Acts of 1849 and 1861, non-official arrangements by deed between a debtor and the general body of his creditors were not only officially recognized, but were in certain circ.u.mstances made binding on all the creditors, including those who refused to a.s.sent to them. Under the act of 1869, although such deeds were no longer recognized or made binding on non-a.s.senting creditors, the proceedings under the ”liquidation by arrangement” and ”composition”

clauses were practically private arrangements by resolution instead of deed, and were proved by experience to be open to the same abuses. It has also been shown that under the act of 1883 no arrangements either by deed or by resolution have any force against dissenting creditors, unless confirmed after full investigation and approval of the bankruptcy courts.

Private arrangements, therefore, cease to form any part of the bankruptcy system. But they are, nevertheless, binding as voluntary contracts between the debtor and such creditors as a.s.sent to them. Being, however, in the nature of a.s.signments of the debtor's property, they are either deemed fraudulent if the benefit of the a.s.signment is limited to a portion of the creditors, or, if it is extended to all they become acts of bankruptcy, and, like any other voluntary a.s.signment, are liable to be invalidated if made within three months prior to the pet.i.tion on which a receiving order is made against the debtor. Treated as voluntary a.s.signments, which are not binding on those who do not a.s.sent to them, such arrangements, where honestly entered into and carried out by capable administration, in many cases form a useful and expeditious method of liquidating a debtor's affairs, and where the debtor's insolvency has been brought about without any gross misconduct they will probably always be largely resorted to. The danger attending them is that even in cases where the debtor has been guilty of misconduct, a private arrangement may be used to screen his conduct from investigation, while in many cases it may be made the medium for the concealment of fraudulent preferences. The absence of any independent audit of the trustees' accounts may also encourage or conceal irregularities in administration. Previous to 1887, however, much inconvenience arose from the fact that the execution of these private arrangements was frequently kept secret, and fresh credit was obtained by the debtor without any opportunity being afforded for the new creditors becoming acquainted with the fact that they were dealing with an insolvent person, and that in many cases they were simply supplying the means for meeting past obligations in respect of which the debtor had already committed default. The Deeds of Arrangement Act 1887 was therefore pa.s.sed to compel the disclosure of such arrangements, by declaring them void unless registered within seven days after the first execution by the debtor or by any creditor. Registration is effected by lodging with the registrar of bills of sale at the central office of the Supreme Court a true copy of the deed and of every inventory and schedule attached thereto, together with an affidavit by the debtor, stating the total estimated amount of property and liabilities, the total amount of composition, if any, and the names and addresses of the creditors. Where the debtor's residence or place of business is outside the London bankruptcy district, the registrar is required to forward a copy of the deed to the registrar of the county court of the district where the debtor's residence or place of business is situated. Both the central and the local registers are open to public inspection on payment of a small fee and general publicity is secured by the action of various trade agencies, which make a practice of extracting and publis.h.i.+ng the information for the benefit of those interested. By section 25 of the Bankruptcy Act 1890, every trustee under a deed of arrangement is required to transmit to the Board of Trade within thirty days of the 1st of January in each year an account of his receipts and payments and such accounts are open to the inspection of any creditor on payment of a small fee. They are not, however, subject to any kind of audit or control by the department. The registrar is also required to make periodical returns of the deeds thus registered to the Board of Trade, in order that a report of proceedings under the Deeds of Arrangement Act may be included in the annual report which the department is required to make on proceedings under the Bankruptcy Acts. Full statistics of such proceedings are accordingly included in these reports, from which it appears that during the ten years ended 31st December 1905 the total number of registered deeds of arrangement was 34,273, with estimated liabilities amounting to 41,663,541, and estimated a.s.sets to 23,020,483.

_Summary of Bankruptcy Procedure._--Subject to certain special provisions in the case of what are termed ”small bankruptcies” (see below), the following summary sets forth some of the more important provisions of the various acts and rules relating to bankruptcy administration grouped under convenient heads to facilitate reference. In some cases the effect of legal decisions has been embodied in the summary.

_Preliminary Proceedings._

_Pet.i.tion and Receiving Order._--Any court exercising bankruptcy jurisdiction in the district in which he resides or carries on business [v.03 p.0326] in England or Wales may make a receiving order against a debtor, whether a trader or not, either on his own pet.i.tion or on that of a creditor or creditors whose claims aggregate not less than 50. In the case of a creditor's pet.i.tion proof must be given of the debt, and of the commission of an act of bankruptcy within three months preceding the date of the pet.i.tion. An act of bankruptcy is committed if the debtor fails to satisfy the creditor's claim upon a bankruptcy notice; if he makes an a.s.signment for the benefit of his creditors generally; if he absconds or keeps house; if he gives notice of suspension of payments; if his goods are sold or seized under execution; if he files in court a declaration of inability to pay his debts; or if he grants a fraudulent preference or conveyance. These acts are here enumerated in the order in which they most frequently occur in practice.

_Object and Effect of Receiving Order_.--The object of the order is to protect the debtor's property until the first meeting of creditors, and to bring the debtor and his affairs within the jurisdiction of the court. Its effect is to stay all separate action against the debtor, and to const.i.tute the official receiver attached to the court receiver of the debtor's property, although the legal t.i.tle still remains in the debtor. Where there is an estate or business to be managed the official receiver may appoint a special manager, who receives such remuneration as the creditors, or failing them the Board of Trade, may determine. As a consequence of the order the following obligations are imposed upon the debtor:--He must make out and submit to the official receiver within a prescribed period a statement of his affairs, containing the names and addresses of his creditors, the amount of their claims and the securities held by them, and the nature and value of his a.s.sets; and accounting for his deficiency. Any material omission or false statement of his losses or expenses is a misdemeanour under the Debtors Act, unless he can prove that he had no intention to defraud. The statement is open to the inspection of creditors.

He must also in every case submit to a public examination in court, in which the official receiver, the trustee and any creditor who has proved his debt may take part. His evidence may be used against him. He may further be specially examined by the court at any time with reference to his dealings or property. He must attend the first meeting of creditors, wait upon the official receiver, trustee and special manager, and give all necessary information, and generally do all acts which may reasonably be required of him with the view of securing a full investigation of his affairs. He may be arrested if there is reasonable ground for believing that he is about to abscond, destroy papers or remove goods, or if he fails without good cause to attend any examination ordered by the court. The court may also for a period of three months order his letters to be re-addressed by the post-office to the official receiver or trustee. With regard to persons other than the debtor, any person capable of giving information respecting the debtor, his dealings or property, may be examined by the court, and a summary order may be made against such person for delivery of any property belonging to the debtor.

_First Meeting of Creditors._

This meeting is summoned by the official receiver, notice being given in the _London Gazette_ and in a local paper, and sent by post to each creditor. A summary of the statement of affairs should accompany the notice, with any observations by the official receiver which he may think fit to make. The object of the meeting is to decide whether any proposal for payment of a composition or for a scheme of arrangement submitted by the debtor is to be entertained, or whether an application should be made to the court to adjudicate the debtor bankrupt. In the latter case the meeting may by an ordinary resolution appoint a trustee with or without a committee of inspection. It may also give any directions as to the administration of the estate. The meeting should be held at the place most convenient for the majority of the creditors. It is presided over by the official receiver or his deputy, who, subject to appeal to the court, admits or rejects proofs for the purpose of voting. For the transaction of business three creditors qualified to vote, or all the creditors if fewer than three, must be present or represented. Only persons who have proved their debts are ent.i.tled to vote, and detailed regulations respecting proofs and the valuation of securities are laid down in the first and second schedules to the act of 1883. One of the chief alterations in the law on this point is the condition imposed on creditors on bills of exchange to deduct from their claims the value of the liability of prior obligants before voting, thus cancelling the power of controlling the proceedings previously possessed by persons who had no real interest in the estate. Votes may be given in person or by proxy, and stringent regulations are laid down with the view of preventing the abuse of proxies. General proxies ent.i.tling the holder to exercise all the powers which the creditor could exercise if present may be given to the official receiver or to any person in the regular employment of the creditor. Special proxies may be given to any person to vote for specified resolutions, or for the appointment of specified persons as trustee and committee. Only official forms can be used, and the blanks must be filled up in the handwriting of the creditor or some person in his regular employment, including the authorized agent of a creditor resident abroad. A proxy must be lodged with the official receiver not later than four o'clock on the day before the meeting or adjourned meeting at which it is to be used. Resolutions are ordinary, special or extraordinary. An ordinary resolution is carried by a majority in value of the creditors voting; a special resolution by a majority in number and three-fourths in value of such creditors. The only instance of a resolution other than these is that required for the approval of a composition or scheme which requires a majority in number and three-fourths in value of all the creditors who have proved. The majority of questions arising at a meeting are decided by an ordinary resolution.

_Adjudication._

If the creditors so resolve, or if a composition or scheme of arrangement is not proposed by the debtor or entertained by the creditors, or if entertained is not approved by the court, or if without reasonable excuse the debtor fails to furnish a proper statement of his affairs, or if his public examination is adjourned _sine die_, the court adjudicates the debtor bankrupt and thereupon his property vests in a trustee, and, subject to the payment of the costs and fees of administration, is divisible among his creditors until all his debts are paid in full with interest at the rate of 4% per annum.

_Effect on Bankrupt_.--The bankrupt is bound to aid the trustee in his administration, and if he wilfully fails to deliver up any part of his property he is guilty of contempt of court. He is also liable to criminal prosecution under the Debtors Act if with intent to defraud he conceals or removes property to the value of 10 or upwards; or if he fails to deliver to the trustee all his property, books, doc.u.ments, &c.; or if he knowingly permits false debts to be proved on his estate without disclosure; or mutilates, falsifies, destroys or parts with books or accounts; or attempts to account for his property by fict.i.tious losses; or if within four months next before presentation of a bankruptcy pet.i.tion, he obtains property on credit by false representation; or pledges or disposes of, otherwise than in the ordinary way of his trade, any property which has not been paid for; or by misrepresentation obtains the a.s.sent of his creditors to any agreement with reference to his affairs. He is also under the act of 1883, guilty of misdemeanour if before his discharge he obtains credit for more than 20 from any person without informing such person that he is an undischarged bankrupt. It is the duty of the official receiver to report any such facts to the court, and if the court is satisfied that there is a reasonable probability of conviction, it is required to order a prosecution which is then conducted by the director of public prosecutions.

_Disqualifications_.--A bankrupt cannot during his bankruptcy or until five years after his discharge, unless the bankruptcy is annulled or he obtains his discharge with a certificate by the court that the bankruptcy was caused by misfortune without misconduct, act as a member of the legislature, or as a justice of the peace, mayor, alderman, councillor, guardian or overseer of the poor, member of a sanitary authority, school, highway or burial board, or select vestry in any part of the United Kingdom.

_Annulment_.--An order of adjudication may be annulled if the court is of opinion that it should not have been made, or that the bankrupt's debts are paid in full, or if a composition or scheme of arrangement is approved by the court after adjudication.

_Discharge_.--The court may also at any time after the conclusion of the bankrupt's public examination, and after hearing the official receiver, the trustee and any creditor, to all of whom previous notice of the application must be given, grant the bankrupt a discharge either absolutely or under conditions, but subject to the following qualifications, viz.:--(1) If the bankrupt has committed a criminal offence connected with the bankruptcy, the application must be refused unless for special reasons the court determines otherwise. (2) If the a.s.sets are not equal in value to ten s.h.i.+llings in the pound of the unsecured liabilities (unless the bankrupt can show that he is not responsible); or if proper books have not been kept; or if the bankrupt has traded after knowledge of insolvency; or has contracted debts without reasonable probability of payment; or failed to account for his deficiency; or contributed to the bankruptcy by rash speculation, gambling, culpable neglect or by unjustifiable expenses; or has taken or defended legal proceedings on frivolous grounds; or has within three months preceding the receiving order given an undue preference; or has increased his liabilities with the view of making his a.s.sets equal to ten s.h.i.+llings in the pound; or has previously been bankrupt or made an arrangement with creditors; or has been guilty of any fraud or fraudulent breach of trust; then the court shall, on proof of any of these facts, either (a) refuse the discharge, or (b) suspend it for a period of not less than two years, or until a dividend of not less than ten s.h.i.+llings in the pound has been paid; or (c) qualify the order by the condition that judgment is entered up against the bankrupt for payment of any unpaid balance of his debts, or of part of such balance out of his future earnings or property. The bankrupt may, however, after two years apply to the court to modify the conditions if he is unable to comply with them. An order of discharge releases the debtor from all his obligations except debts due to the crown, and other obligations of a public character which can only be discharged with the consent of the Treasury, debts incurred by fraud, and judgment debts in an action for seduction or as a co-respondent in a matrimonial suit or under an affiliation order, which are only released to such extent and subject to such conditions as the court may expressly order. The release of the bankrupt does not operate as a release [v.03 p.0327] of any partner or co-obligant with him. Neither does it release the bankrupt from liability to criminal prosecution.