Bankruptcy, or INSOLVENCY, is the state of a person declared to be unable to pay his debts. In England, insolvency is a term which had, till the distinction was abolished in 1861, long been confined to the case of a non-trader who was unable to pay his debts. All who were traders were said, in the same circumstances, to be, not insolvent, but bankrupt. Different courts, called the Bankrupt and the Insolvent Courts, were applicable respectively to these two great divisions of mankind, traders and non-traders. In the case of traders, the Court of Bankruptcy was the court to which they or their creditors applied. That court, whenever a trader was unable to pay his debts—certain tests of which inability were called acts of bankruptcy—on the application of a creditor, took forcible possession of his property or his assets of every kind, converted these into money, and distributed the proceeds impartially among the creditors, according to certain rules, at the joint expense of the creditors. In the course of doing this, the court required the bankrupt to state all the property he had, where it was, and to give explanations as to what had been lately lost; and it was a crime for him to conceal or make away with any part of his property to the prejudice of this impartial distribution. The creditors also came in and proved their debts against his estate, thereby showing their title to share in it. In this way the debtor was entirely stripped of everything (with a few trifling exceptions) which he had, and which was saleable; and, on the other hand, he received a certificate which entirely cleared him of the encumbrance of his past debts for ever—freed him not only from imprisonment, but even from the liability to pay more in future, should he afterwards become rich; and he could thus begin the world anew.
On the other hand, the non-traders, who consisted of country gentlemen, professional men, gentlemen at large, and nondescripts of every degree who were not traders, fell under the care of the Insolvent Court. These non-traders petitioned the court voluntarily, instead of their creditors doing so, as was the case in the Bankrupt Court, and they of course put off this application till the last, when they were in prison, though they might also petition before any creditor put them in prison. The sole condition on which the Insolvent Court granted them its protection, and discharged them from prison, was, that they should not only give up all their property, but state fully all the debts and liabilities they had incurred. If they did this satisfactorily, the court relieved them from imprisonment, but did not entirely free them from the debt they had incurred. On the contrary, they were still liable for their debts; and if ever they should in future become rich enough to pay twenty shillings in the pound, they were still held liable to make up that amount. This contingency, however, seldom happened, and, moreover, when it did happen, considerable leniency was shown to the debtor, so that practically, both in bankruptcy and insolvency, the debtor was discharged, and was at least saved from imprisonment. The bankruptcy laws date from the time of Henry VIII., and the insolvency laws from the time of Elizabeth, the distinction as above explained having always been kept up between them till the statute of 1861. By that statute the Insolvent Court was abolished.
Important changes were made in the practice of bankruptcy by the Act of 1869, which repealed the prior enactments and rendered the law more uniform. Under that act non-traders as well as traders might be made bankrupt; and even peers of the realm not only might be made bankrupt, but, on being declared so, were at once disqualified from sitting and voting in the House of Lords till they received their discharge. Another Act provided that a peer commits a breach of privilege if he sits or votes, or attempts to do so, while thus disqualified. And if he is a representative peer, a new election must take place when he becomes bankrupt. But a much more complete and beneficial change in bankruptcy administration was made by the Bankruptcy Act, 1883, 46 and 47 Vict. chap. 52. That act abolished the Special Court of Bankruptcy, and transferred its jurisdiction to the High Court of Justice, the Lord Chancellor selecting one of the judges to transact that class of business. The petition is presented in the High Court if the debtor resides in the London district, or if he is not resident in England, or if the creditor does not know where he resides. The London district includes all the area of the ten metropolitan county courts. The rest of England is divided into separate jurisdictions, and the judge of each county court is the ordinary judge. A large part of bankruptcy jurisdiction, however, both in the High Court and the County Courts, is exercised by the registrars, who hear the petitions, hold public examination of debtors, and even approve of compositions and grant discharges, when these are unopposed. There is an appeal from the County Courts to a Divisional Court of the High Court of Justice, in which the bankruptcy judge is sitting, and in the general case there is no further appeal (Bankruptcy Amendment Act, 1884). The ordinary right of appeal remains as regards the original jurisdiction in bankruptcy of the High Court. All bankruptcy courts have very large and useful discretionary powers in dealing with procedure. The comptroller used to keep a register of all bankruptcies, showing the state and progress of each. He has now been transferred from the Court to the Board of Trade.
The tests of bankruptcy, or rather the acts done by a trader which make him liable to be proceeded against as a bankrupt, are technically called acts of bankruptcy. These are—departing the realm; remaining abroad; absenting himself from his dwelling-house or keeping (himself prisoner in his) house, all with the intent of defeating or delaying his creditors; allowing his goods to be taken in execution for debt; executing a fraudulent grant, gift, or conveyance of his lands or goods; filing in court a declaration of inability to pay debt, or a simple notice that he suspends payment; or non-payment of a judgment debt after what is called a bankruptcy notice. If a trader execute a conveyance of his whole property to a trustee for the benefit of his creditors, this will be treated as an act of bankruptcy. And, after a petition has been presented, the paying or giving security to any one creditor, so that he shall receive more than the other creditors, is void and null.
The mode in which an adjudication in bankruptcy is conducted in England is as follows: The act of bankruptcy must have occurred within three months before the proceeding is commenced. The first step is a petition to the court. This may be presented by either one or several creditors. If, as is most usual, it is presented by a creditor or creditors, then such creditors must have a liquid, or duly constituted, claim of debt amounting to not less than £50 in the aggregate. If the debt is due under a mortgage or other security, the petitioning creditor must state his willingness to give up his security for the benefit of the creditors, or he must estimate its value, and the unsecured balance must amount to £50. If the petition be presented by the debtor himself, it cannot be withdrawn without leave of the court. The petition will not be entertained unless the debtor be domiciled in England, or within a year has ordinarily resided or had a dwelling-house or place of business in England; the interest of Scottish and Irish debtors being in this way protected. On the petition for adjudication of bankruptcy being presented, together with an affidavit of the debt, it is filed in court, and on proof of the particular act of bankruptcy, the court may appoint a special manager if the nature of the business requires it; otherwise the usual receiving order is pronounced, and the official receiver takes the estate until the creditors meet and determine, after the debtor's public examination and statement of affairs, whether he shall be adjudged bankrupt, or whether a scheme of arrangement or composition shall be entertained. Such a scheme must be accepted by three-fourths in value of the creditors, and will not be approved by the court unless it is reasonable and for the benefit of the general body of creditors. In the event of adjudication being resolved upon, the creditors appoint a trustee to receive and distribute the estate with the advice of a committee of inspection. The trustee gives security to the satisfaction of the Board of Trade. Even after adjudication, a composition may be accepted by special resolution, and the bankruptcy annulled. The bankrupt is bound to assist in every way in the discovery and realisation of his property, and he may be arrested if there is reason to believe that he is going to defeat these main purposes of the bankruptcy. The court may examine any one suspected of having the debtor's property, or being indebted to him, or being able to give information about the estate. They have also full discretion as to the discharge of the bankrupt, which may be absolute, or on conditions with respect to any earnings or income afterwards becoming due to the bankrupt, or after-acquired property. The discharge is not given if the bankrupt has committed any of the offences mentioned in the Act of 1883, or in the Debtors Act, 1869. The first class illustrate the severity of the new law; they are such as not keeping proper books within the three years before the bankruptcy; continuing to trade after knowledge of insolvency; contracting a debt without any reasonable expectation of being able to pay it; bringing on bankruptcy by rash and hazardous speculations, or an extravagant manner of living; causing unnecessary expense by frivolous or vexatious defences to an action; having given, within three months before bankruptcy, an undue preference; having previously been adjudged bankrupt, &c. An undischarged bankrupt who obtains credit to the extent of £20 without mentioning his bankruptcy, may be punished for misdemeanour. Every bankrupt is disqualified for all public functions, not merely for sitting in parliament, but for election to town councils and other local boards, and for acting as a justice of the peace. The disqualification ceases if the bankruptcy is annulled, or when the bankrupt is discharged with a certificate that the bankruptcy was caused by misfortune without misconduct.
As regards the administration of the property by the trustee, the act lays down very precise rules in schedules, and the Lord Chancellor has power to make further rules. Every liability of the debtor is provable, except a demand for unliquidated damages not founded on contract or breach of trust. Where there have been mutual dealings between the debtor and a creditor, the latter proves only for the balance. A preference is given to taxes and rates, wages or salary of clerks and servants and workmen for four months up to £50, and by a statute in 1886, this preference is established in the case where an agricultural labourer has agreed to take his wages in a lump sum at the end of the year. If there is any surplus, it is first applied in payment of interest on debts. From the assets available for distribution, there is excepted property held by the bankrupt in trust, and his trade tools, and the necessary wearing apparel and bedding of himself and family, but not beyond the value of £20. Goods in the reputed ownership of the bankrupt, though belonging to another, are available for distribution; and also the pay or salary or pensions of public servants to a certain extent. On the other hand, the trustee is entitled to disclaim burdensome property or shares or contracts likely to result in loss. The trustee has full powers of sale and compromise. The first dividend should be paid within four months of the first meeting of creditors, and subsequent dividends at intervals of not more than six months. In general, the trustee is paid by commission, partly on the amount realised, and partly on the amount distributed. If one-fourth of the creditors dissent from this, the matter is adjusted by the Board of Trade. That Board also appoints the official receivers in each district, and they have opened in the Bank of England a bankruptcy estates account, into which bankruptcy money from every district in England must be paid. If the Committee of Inspection make out a special case, the Board of Trade will permit money to be paid into a local bank. The creditors have the power of removing the trustee by a simple vote.
The Bankruptcy Act, 1883, also contains important provisions as regards small bankruptcies, where the property of the debtor is not likely to exceed £300; in such cases, the official receiver becomes trustee, there is no Committee of Inspection, and the procedure is more summary. Also, where judgment has been obtained in a county court against a debtor unable to pay, but whose total indebtedness is less than £50, that court may administer his estate, and make an order for the payment of his debts by instalments. The act also provides for the administration in bankruptcy of the estate of a person dying insolvent, which formerly could be accomplished only by a suit in Chancery.
The criminal offences connected with bankruptcy are defined by the Debtors Act, 1869, as modified by the Act of 1883, which gives all bankruptcy courts power to commit for the trial of such offences, and directs the public prosecutor to take proceedings. The most common offences are—the bankrupt's not surrendering himself to the jurisdiction of the court at the time appointed; not making a full discovery of all his property and his dealings with it; concealing or embezzling part of his property above £10; not informing his trustee of any false debt proved under his bankruptcy; falsifying his books; fraudulently accounting for his property by fictitious losses; pawning or mala fide disposing of property within three months before the bankruptcy; or any of the offences mentioned above as disentitling a bankrupt to discharge.
In Ireland, the code of Bankruptcy differs largely from that in England and Scotland. It consists of the Irish Bankrupt and Insolvent Act, 1857; the Debtors Act (Ireland), 1872; and the Bankruptcy (Ireland) Amendment Act, 1872. The first of these statutes contains 410 sections, and 26 schedules, which were largely modified in 1872. The general principle is that of adjudication in the Court of Bankruptcy at Dublin, the estate being taken by official assignees, who act along with an assignee afterwards appointed by the creditors. They are paid by a percentage on realisation. Prior to 1872 the law was open only to enumerated classes of traders. The procedure in insolvency at quarter sessions, provided for by the Act of 1857, has been discontinued, and now local courts in Ireland have no jurisdiction in bankruptcy, except under reference from the Central Court. Compositions may be sanctioned by three-fifths in number and value of the creditors, and under the trustee clauses of the Act of 1872, winding up by a trustee and committee of inspection was introduced. Imprisonment for debt was abolished in 1872, and new provisions introduced for the punishment of fraudulent debtors.
In Scotland, Bankruptcy, or Sequestration, now universally proceeds under the Bankruptcy (Scotland) Act, 1856, 19 and 20 Vict. chap. 79, which superseded previous general Acts of 1815 and 1839, and is substantially the same process as that which prevails in England; but there are some differences of no small importance, besides the different names given to the steps of the process. Certain acts and conduct of the bankrupt are held to be symptoms of notour bankruptcy, corresponding to what are called in England acts of bankruptcy. The first step is a petition for sequestration, which may be presented by the debtor or by creditors whose debt must be of the same amount as in England. There is no separate court of bankruptcy, but the sheriff of the county, or the Bill Chamber of the Court of Session, has jurisdiction to award sequestration, and the court then appoints a judicial factor, if necessary, until the creditors elect a trustee, in whom the property vests. The creditors also appoint commissioners to advise with the trustee as to the management of the estate. The duties of the trustee and commissioners are nearly identical with those of the trustee and committee of inspection in England. The creditors prove their debts in a similar way. There are also powers of winding up the estate under a deed of arrangement. The whole procedure in the sequestration has been very much imitated in the statute passed in England. The commissioners of the creditors fix the trustee's remuneration. The trustee examines the grounds of claim of creditors, there being an appeal to the Lord Ordinary or sheriff, and he examines the bankrupt and his family on oath, if necessary. On a report from the trustee as to the conduct of the bankrupt, which is not demandable by the bankrupt till five months after the sequestration, the bankrupt petitions for his discharge, and when the creditors all concur, he is entitled to his discharge at once if he has paid 5s. in the £1; at later dates, if he has the concurrence of a certain number of his creditors, he is also entitled to a discharge; but if the creditors oppose, the court has a discretionary power to grant or suspend the discharge with or without conditions. But in no case will a discharge be given in a case where there has been fraudulent concealment of effects, or where less than 5s. in the £1 has been paid, unless it is proved that the failure to do so arose from circumstances for which the bankrupt is not responsible. In Scotland, there is no distinction, as there was once for many purposes in England, between traders and non-traders. Another peculiarity of a sequestration is, that the process is applicable not only in the case of debtors who are alive, but in cases of persons who have died in insolvent circumstances. In Scotland, there is a process called cessio bonorum, the application of which has been very much extended by the recent statutes of 1880 and 1881, abolishing imprisonment for debt, and giving creditors the right to institute proceedings; and where the debtor has trifling assets, it is in the power of the creditors to resolve that their debtor shall not have a discharge under the sequestration, but only a decree in a Cessio Bonorum (q.v.).
By the Bankruptcy Frauds and Disabilities Act, 1884, the law of Scotland was assimilated to that of England in certain important respects. The same disqualifications of bankrupts for parliamentary and municipal office are introduced; and it is declared an offence for an undischarged bankrupt to obtain credit for £20 or more.
With regard to the effect of a bankruptcy in either of the three kingdoms, the rule is, that whether the bankruptcy is awarded in England, Ireland, or Scotland, all the property of the bankrupt vests in the assignee or trustee, wherever it is situated; and when the bankrupt is discharged, the discharge is thereafter complete and given effect to in all parts of the United Kingdom. For some time after the passing of the Act of 1856, owing to the belief that it was much easier to be made a bankrupt, and obtain a discharge from debt, in Scotland than in England, various English debtors resorted to Scotland for forty days, in order that they might be made bankrupt, no doubt thinking that creditors would be less likely to oppose their discharge at that distance; and after their discharge, they returned to England, and pleaded this Scotch bankruptcy. But a recent statute has given power to the Scotch courts to recall such sequestrations, where, from the situation of the assets and the residence of the majority of the creditors, it appears that the distribution ought to take place in England or Ireland. By an Act of 1875, clerks, shopmen, and servants employed by a bankrupt have a preference for four months' wages, and workmen for two months' wages. There is in Scotland an Accountant in Bankruptcy, to whom trustees render accounts, and whose report is accepted by the court as conclusive on a variety of matters. The Accountant makes a general report to the Court of Session every year on all sequestrations, but this is not published or laid before parliament.
In the United States, the several states have power to legislate on the subject of bankrupt and insolvent laws, subject to the authority conferred upon congress by the constitution to adopt a uniform system of bankruptcy, which authority, when exercised, is paramount. Such state laws, discharging the person or property of the debtor, cannot constitutionally be made to apply to contracts entered into before they were passed; and they apply only to contracts made within the state between citizens of that state. The power of congress in this matter has been exercised by a series of statutes, the latest of which is dated 1878, and which deals with the general doctrines of voluntary and involuntary bankruptcy, offences against bankruptcy law, and the constitution of bankruptcy courts. It is unnecessary to describe the varieties of practical detail in the administration of the various states.
For England, see Robson, On the Law of Bankruptcy (6th ed. 1887); for Scotland, Bell's Commentaries, and Goudy's Law of Bankruptcy in Scotland (1886; new ed. 1895).