for wages and salaries; and the Bankruptcy (Discharge and Closure) Act
1887, dealing with unclosed bankruptcies under previous acts.
[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 documents 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, cumbersome 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 assets. 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 L200 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 passing 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 instituted for the offence except by order of the
bankruptcy court. The committee made recommendations of much the same
character with regard to punishing 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 title, 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 assignments 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
illustrations 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 L61,685,678,
and estimated assets amounting to L26,001,417. 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
L22,380,000 per annum, the estimated liabilities during the ten years
ending 1905 only averaged L6,168,567 per annum. But during the latter
period there was an annual average of 3426 private arrangements involving a
further estimated annual liability of L4,166,354 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 circumstances made binding on all the creditors, including those
who refused to assent to them. Under the act of 1869, although such deeds
were no longer recognized or made binding on non-assenting 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 assent to them. Being, however, in the
nature of assignments of the debtor's property, they are either deemed
fraudulent if the benefit of the assignment 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 assignment, are liable to be invalidated if
made within three months prior to the petition on which a receiving order
is made against the debtor. Treated as voluntary assignments, which are not
binding on those who do not assent 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 passed
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 publishing 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 L41,663,541, and estimated assets to L23,020,483.
_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._
_Petition 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 petition or on that of a
creditor or creditors whose claims aggregate not less than L50. In the case
of a creditor's petition proof must be given of the debt, and of the
commission of an act of bankruptcy within three months preceding the date
of the petition. An act of bankruptcy is committed if the debtor fails to
satisfy the creditor's claim upon a bankruptcy notice; if he makes an
assignment 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 constitute
the official receiver attached to the court receiver of the debtor's
property, although the legal title 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 assets; 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 entitled 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 entitling 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 L10 or upwards; or if he fails to deliver
to the trustee all his property, books, documents, &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 fictitious losses; or if within four months
next before presentation of a bankruptcy petition, 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 assent 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 L20 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 assets are not equal in value to ten
shillings 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 assets equal to
ten shillings 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 shillings 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.
_Composition or Scheme of Arrangement._
After a receiving order has been made the debtor may submit a proposal for
the payment of a composition, or for the liquidation of his affairs, by a
trustee or otherwise, without adjudication. The proposal must be lodged
with the official receiver in sufficient time to allow notice, together
with a report by that officer, to be sent to the creditors before the
meeting is held at which it is to be considered. If the proposal is
entertained at the meeting by a majority in number and three-fourths in
value of all the creditors who have proved their debts, and if it is
thereafter approved by the court, it becomes binding upon all creditors who
would be bound by an order of discharge had the debtor been adjudicated
bankrupt. A similar proposal may be made after adjudication, and if
entertained by the creditors and approved by the court, the adjudication
may be annulled. The debtor's release will be subject to the terms of the
scheme, but his future acquired property will not pass to the creditors
unless there is an express stipulation to that effect. If default is made
in carrying out the scheme, or if it is found that it cannot proceed
without injustice or undue delay, the court may at any time adjudicate the
debtor bankrupt, in which case the scheme will fall to the ground, except
in respect of past transactions under it. The approval of a composition or
scheme does not release the debtor from his liabilities under the criminal
law, nor from the necessity of undergoing a public examination which must,
in fact, be held and concluded before the approval of the court is applied
for. Also before such approval is given a report must be filed by the
official receiver upon its terms and on the conduct of the debtor, and the
court must be satisfied after hearing that officer and any creditor, that
the proposal is reasonable and calculated to benefit the creditors, and
that no criminal offences connected with the bankruptcy have been committed
by the debtor. Further, if any fact is proved which would have prevented
the debtor from obtaining an absolute or unconditional order of discharge
had he been adjudged bankrupt, the composition or scheme cannot be approved
unless it provides reasonable security for the payment of not less than
seven shillings and sixpence in the pound on all the unsecured debts. Where
a trustee is appointed to carry out the composition or scheme, all the
provisions of the act with reference to the remuneration of the trustee,
the custody of funds, the audit of his accounts and the control exercised
by the Board of Trade apply in the same manner as they would under an
adjudication. Further, the provisions relating to the administration of
property, proof of debts, dividends, &c., will also apply, so far as the
nature of the case and the terms of the arrangement admit.
_Property divisible among the Creditors._
No part of the law of bankruptcy is more intricate, or has been the subject
of more litigation than this, and any detailed view of the effect of legal
decisions can only be gathered by a perusal of the cases; but the following
general principles may be stated:--The term "property" includes not only
property of which the bankrupt is the true owner, but property in his
possession, order or disposition in his trade or business with the consent
of the true owner, in such circumstances that he is the reputed owner
thereof. The application of the doctrine of reputed ownership has been
considerably restricted in recent years by the growth of alleged trade
customs, in accordance with which property is frequently lent under a
contract of "hire and purchase" or otherwise; and by the decisions of the
courts that where such custom is sufficiently proved the doctrine does not
apply. Further, the trustee's title not only includes property in the
actual possession of the bankrupt, but relates back to the date of the
first act of bankruptcy committed by him within the three months preceding
the presentation of the bankruptcy petition, and thus invalidates all
payments and assignments to creditors made during that period with
knowledge on the part of the creditor or assignee of the commission of the
act of bankruptcy. In such cases the trustee may, therefore, require the
money or property to be restored to the estate. And even where no prior act
of bankruptcy is proved, any payment made to a creditor with the view of
giving such creditor a preference over the other creditors, within the
three months preceding the presentation of the petition on which the payer
is made bankrupt, is rendered void as against his trustee. Settlements of
property within the two years preceding the bankruptcy, unless made before
and in consideration of marriage, or made in good faith for valuable
consideration, are also void, as are similar settlements within ten years,
unless it is proved that the settlor was (independently of the settled
property) solvent at the date of the settlement, and that the interest in
the property passed to the trustees on the execution of the deed. The same
rule applies to covenants to settle in consideration of marriage
future-acquired property in which the debtor had no interest at the date of
the marriage (other than property acquired by the bankrupt through his
wife), if such property is not actually transferred before the bankruptcy.
Executions by a creditor not completed at the date of the receiving order
are also void, and the proceeds of an execution in the hands of the sheriff
must, with certain exceptions and subject to deduction of costs, be handed
over to the trustee. But all property held by the bankrupt on trust, and
tools of trade, wearing apparel and bedding to a total value not exceeding
L20, are excluded from the property divisible among the creditors. With
respect to property acquired by the bankrupt, whether by gift or legacy, or
consisting of accumulations of business or other profits after the
commencement of the bankruptcy, and before he obtains his discharge, the
trustee's title also prevails; but bona-fide transactions by the debtor for
value, other than transactions relating to freehold property, appear to be
valid. Where the bankrupt is a beneficed clergyman the trustee may, subject
to certain provisions for the due discharge of the duties of the office,
apply for the sequestration of the profits of the benefice; and where he is
in receipt of a salary, income or pension, &c., the court may order any
part thereof to be paid to the trustee, but where he is an officer of the
army, navy or civil service, such order is only to be made with the consent
of the chief of the department concerned.
_Claims of Creditors and Dividends._
In the distribution of the debtor's property certain claims are entitled to
priority over others. Thus the landlord, although not entitled to a
preference out of the funds in the hands of the trustee, can distrain for
unpaid rent on the goods and effects of the debtor remaining on the
landlord's premises, but where the distraint is levied after the
commencement of the bankruptcy this right is limited by the act of 1890 to
six months' rent due before adjudication, the remainder of his claim
ranking for dividend with the claims of other creditors. Various gas and
water companies have also statutory powers of distraint under special acts,
but the policy of recent legislation has been to discourage any extension
of such privileges. Where the bankrupt holds an office of trust in any
savings bank or friendly society, any balance in his hands due to such bank
or society has been held under the acts relating to these bodies to be
payable in preference to any other claim against the estate. Other
preferential claims are regulated by the Bankruptcy Acts and by the
Preferential Payments in Bankruptcy Act of 1888, and include taxes,
parochial and other local rates for not more than one year, wages and
salaries for four months, but not exceeding L50 (limited in the case of
ordinary labourers and workmen to two months' wages not exceeding L25), and
agricultural labourers' claims not exceeding one year's wages, if hired by
special contract for payment of a lump sum at the end of a year. These
claims are entitled to preference not only over funds in the hands of the
trustee, but also over the proceeds of any distraint levied by the landlord
within the three months prior to the receiving order, the latter in that
case becoming a preferred creditor for the amount so paid. Articled clerks
and apprentices may also be allowed repayment of a proportion of the
premium on their unexpired agreements. On the other hand, usual trade
discounts (exceeding 5%) must be deducted from traders' proofs, and the
following claims are postponed until the general creditors are paid in
full, viz. claims by a married woman for loans to the husband for the
purposes of his business, claims for loans advanced to any person in
business at a rate of interest varying with the profits, and claims for
interest in excess of 5% per annum. Subject to these exceptions all debts
proved in the bankruptcy must be paid _pari passu_. Any surplus after
payment of 20s. in the pound and interest at the rate of 4% per annum, from
the date of the receiving order, is payable to the bankrupt.
_Proofs of Debt._--All claims and liabilities present or future, certain or
contingent, arising out of obligations incurred before the date of the
receiving order are provable in the bankruptcy, an estimate of the
liability in the case of contingent debts being made by the trustee subject
to appeal to the court. But demands in the nature of unliquidated damages
arising otherwise than by reason of a contract, promise or breach of trust
are not provable. A secured creditor if he proves must either surrender his
security, or value the security and prove for the balance; and the trustee
can thereupon, subject to the creditor's power in certain circumstances to
amend the valuation, take over the security by paying the amount of the
valuation, or may require it to be realized. He may be required by the
creditor to elect which of these courses he will adopt, failing which the
equity of redemption will vest in the creditor. For further regulations as
to proofs, the time within which they must be lodged for voting and for
dividend, and the manner of dealing with them, reference should be made to
the first and second schedules of the act of 1883 and the rules relating
thereto.
_Dividends._--After payment of costs of administration and preferential
debts, it is the duty of the trustee to distribute the estate with all
convenient speed,--the first dividend within four months after the first
meeting of creditors, and subsequent dividends at intervals of not more
than six months, but the declaration may be postponed for sufficient reason
by the committee of inspection. Notice of the intention to declare a
dividend is gazetted and sent to each creditor mentioned in the bankrupt's
statement of affairs who has not proved. The notice should state the last
day for proving in order to participate in the distribution, and should be
given not more than two months before the declaration. When the dividend is
declared, notice of the amount due, and of the place where the same is
payable, is sent to each creditor who has proved, with a statement showing
particulars of the estate. And provision must be made for creditors at a
distance, who have not had time to prove, for disputed claims, and for
debts the subject of claims not [v.03 p.0328] yet determined. Creditors who
fail to prove before the declaration of a dividend are entitled to receive
their dividends on proving before any subsequent dividend is declared, but
cannot disturb the distribution of any dividend already declared. Before
distributing a final dividend notice is sent to every creditor whose claim
has been notified to the trustee, but not finally established, with an
intimation that unless so established within a specified period he will be
excluded from participation in the estate. In the case of a bankrupt firm
the joint creditors are not entitled to receive a dividend out of the
separate property of the bankrupts until all the separate creditors are
paid in full.
_Trustee's Administration._
While the interim preservation and management of the estate is conducted by
or under the direct supervision of officers appointed by and responsible to
the Board of Trade, the ultimate realization and distribution of the assets
devolve upon the trustee appointed by the creditors. But besides acting as
receiver prior to the first meeting of creditors, the official receiver
also becomes trustee by operation of law on the making of an order of
adjudication. He vacates the office when a trustee is appointed by the
creditors, and certified by the Board of Trade, but again becomes trustee
on the creditors' trustee being released, dying, resigning or being removed
from office. As the bankrupt's property vests in the trustee for the time
being, and passes from trustee to trustee by operation of law, and without
any formal act of conveyance, the continuity of the office is thus secured.
_Appointment of Trustee._--A trustee may be appointed by a majority in
value of the creditors voting, at the first or any subsequent meeting, or
the appointment may be left to the committee of inspection. In either case
the appointment is subject to confirmation by the Board of Trade, who may
object on the ground that the creditors have not acted in good faith in the
interests of the general body, or that the person appointed is not fit to
act, or occupies such a position in relation to the debtor, to any
creditor, or to the estate, as makes it difficult for him to act with
impartiality, or that in any previous case he has been removed from office
for misconduct or for failure without good cause to render his accounts for
audit. An appeal from such objection to the High Court lies at the instance
of a majority in value of the creditors, but in the absence of an appeal it
is fatal to the appointment. Before being confirmed, the trustee-elect must
also furnish security to the satisfaction of the Board of Trade, and such
security must be kept up to the amount originally fixed, or to such lesser
amount as that department may require throughout the tenure of the
trusteeship, failing which the trustee is liable to be removed from office.
Where the creditors fail to appoint a trustee, the Board of Trade may do
so, but such appointment may at any time be superseded by the creditors.
_Removal._--The trustee may be removed by the creditors at a meeting
summoned for the purpose without reason assigned, or by the Board of Trade
for misconduct, or for incapacity or failure to perform his duties, or on
either of the other personal grounds of objection to which the appointment
is open. But the removal is in like manner subject to appeal at the
instance of creditors. If a receiving order is made against a trustee he
thereby vacates office. He may also, with the consent of a general meeting
of creditors, resign, but his resignation does not operate as a release
from his liability to account for his administration.
_Powers and Duties._--The trustee is required to take immediate possession
of the bankrupt's property, including deeds, books and accounts, and has
the powers of a receiver in the High Court for the purpose of enforcing
delivery. After payment of the costs of administration it is his duty to
distribute the estate in dividends as speedily as possible. He may also,
and with the sanction of the committee, or, where there is none, with that
of the Board of Trade, carry on the business so far as is necessary to a
beneficial winding-up, institute or defend legal proceedings, employ a
solicitor to do any business previously sanctioned by the same authority,
compromise debts and claims, raise money on mortgage, sell property on
credit, or divide the estate where practicable among the creditors in its
existing form. He may, without special sanction, but subject to any
directions which may be given by the creditors in general meeting, or
failing them by the committee, sell the property or any part of it for
cash, including business goodwill and book debts, and either by public
auction or private treaty, and generally exercise all the powers which the
bankrupt might before adjudication have exercised in relation to the
property, or which are by the Bankruptcy Act conferred on the trustee.
Where any part of the property is held subject to onerous obligations, such
as the payment of rent, &c., the trustee may disclaim the same, subject in
certain cases to the leave of the court, and the disclaimer operates to
determine all interest in or liability in respect of the property on the
part of the estate. The trustee is required to keep a record book (which is
commenced by the official receiver), containing minutes of the proceedings
in the bankruptcy, and a cash book in the prescribed form, in which all
receipts and payments by him must be entered. All monies received must
forthwith be paid into an account at the Bank of England, entitled the
"Bankruptcy Estates Account," which is under the control of the Board of
Trade, unless where in special circumstances the sanction of that
department is obtained to the opening of a local banking account, but in no
circumstances must estate monies be paid to the trustee's private account.
When monies are required for the purpose of the estate, special cheques or
money orders are issued by the Board of Trade on the application of the
trustee.
_Control over Trustee._--In his administration of the estate the trustee is
subject to control by the committee of inspection, the creditors, the court
and the Board of Trade. The committee is appointed by the creditors, and
must consist of not more than five nor less than three creditors or
authorized representatives of creditors. It acts by a majority present at a
meeting, and should be convened once a month unless it otherwise directs.
If no committee is appointed, the Board of Trade may give any direction or
permission which might have been given by a committee. Directions given by
the committee, if not inconsistent with the provisions of the act, are
binding on the trustee, unless contrary to or overruled by those of the
creditors or of the court. The official receiver or trustee may summon a
meeting of the creditors at any time to ascertain their wishes, and must do
so when so required by one-sixth in value of the creditors or when directed
by the court. The Board of Trade may also direct the official receiver to
summon a meeting for the purpose of reviewing any act done by the trustee
or any resolution of the committee of inspection. Further, the trustee may
apply to the court for directions in any particular matter, and the court
may also, on the application of any person aggrieved reverse or modify any
act of the trustee, or make such order as it deems just. The directions of
the court override those of the creditors. The Board of Trade is required
to take general cognizance of the conduct of trustees, to inquire into any
complaints by creditors, and in the event of any trustee not faithfully
performing his duties, to take such action, including the power of removal,
as may be expedient. It may also direct a local investigation of the
trustee's books and accounts, and may require him to answer any inquiries,
or may apply to the court to examine him on oath. If any loss has arisen to
the estate from any misfeasance, neglect or omission of the trustee, it may
require him to make it good. The orders of the Board of Trade under the
powers conferred by the act may be enforced by the court by committal of
the trustee or otherwise.
_Audit of Accounts._--The trustee's accounts must be audited by the
committee of inspection not less than once in every three months; and once
in every six months, as well as at the close of the administration, the
record and cash books must also be submitted with the vouchers, and the
committee's certificate of audit to the Board of Trade for final audit. If
it appears that the trustee has retained more than L50 in hand for more
than ten days without a satisfactory explanation, he may be removed from
office, surcharged with interest at the rate of 20% per annum and lose all
claim to remuneration.
_Remuneration._--The trustee's remuneration is fixed by the creditors or by
the committee if so authorized by them. It must be in the nature of a
percentage on the amount of the realization and on the dividends. If
one-fourth of the creditors in number or value dissent from the resolution,
or if the bankrupt satisfies the Board of Trade that the remuneration is
excessive, the Board may review the same and fix the remuneration. A
trustee may not receive any remuneration for services rendered in any other
capacity, _e.g._ as solicitor, auctioneer, &c., beyond that voted to him as
trustee; nor may he share his remuneration with the bankrupt, the solicitor
or other person employed about the bankruptcy; or receive from any person
any gift, or other pecuniary or personal benefit in connexion therewith.
_Costs._--A trustee receiving remuneration is not allowed the costs of any
other person in respect of duties which ought to be performed by himself.
All bills of solicitors and other agents employed must be taxed before
payment, as being in accordance with the prescribed scales of costs; and
the taxing master must satisfy himself that the employment has been
properly authorized before the work was done. All bills of costs must be
delivered to the trustee within seven days of the request for the same,
otherwise the estate may be distributed without regard to such costs.
_Release._--When the property, so far as it is capable of realization, has
been realized and distributed, the trustee must apply to the Board of Trade
for his release, forwarding to each creditor a notice of his having done
so, together with a copy of his final accounts, and the Board of Trade,
after preparing and considering a report on the same, and the objections of
any person interested, may, subject to appeal to the High Court, grant or
withhold the release. If a release is withheld, the court may, on the
application of any person interested, make such order against the trustee
as it thinks just. The release when granted operates as a removal from
office, and thereupon the official receiver again becomes trustee, and is
thus in a position, even after the nominal close of the bankruptcy, to deal
with any circumstances which may arise, or which have not been foreseen and
provided for.
_Small Bankruptcies._
When the official receiver reports, or the court is otherwise satisfied
that the debtor's property is not likely to realize more than L300, the
court may make an order for the summary administration of the estate, in
which case, if the debtor is adjudged bankrupt, the official receiver in
the ordinary course becomes and remains trustee, and certain other
modifications are effected with the view of simplifying [v.03 p.0329] and
accelerating the procedure. The chief of these modifications are as
follows, viz. the Board of Trade acts as committee of inspection; there is
no advertisement of the proceedings in a local paper; in legal proceedings
all questions of law and fact are determined by the court without a jury;
adjudication may be made on a report by the official receiver before the
first meeting of creditors where no composition or scheme is proposed;
meetings of creditors may be held in the town where the court sits or the
official receiver's office is situated; notice to creditors of meetings
other than the first meeting, or of application by a debtor for his
discharge, are dispensed with in the case of creditors for amounts not
exceeding L2. Costs, other than a solicitor's charges, may be paid without
taxation; and the time for declaring the first dividend is extended to six
months, but the whole estate must be realized and distributed within this
period if practicable. No modification, however, is permitted in the
procedure relating to the public examination and discharge of the bankrupt.
Notwithstanding that an order has been made for summary administration, the
creditors may at any time by a resolution passed by a majority in number
and three-fourths in value of those voting at the meeting, appoint a
trustee in place of the official receiver, in which case the summary order
ceases to be operative.
_Scottish Bankruptcy Legislation._
In Scotland, as in England, the law of bankruptcy arose as a remedy against
the frauds of insolvent debtors. It was declared by an act of the Scottish
parliament (1621, c. 18) that no debtor after insolvency should
fraudulently diminish the fund belonging to his creditors, and if a deed of
assignment was gratuitously executed after the contracting of debt in
favour of a near relation or a confidential friend, fraudulent dealing was
to be presumed. The act 1696, c. 5, settled the definition of a notour or
notorious bankrupt, a question which had previously engaged the attention
of the judges of the court of session. The statute defines "a notour
bankrupt" to be any debtor who, being under diligence by horning or
caption, at the instance of his creditors, shall be either imprisoned, or
retire to the abbey or any other privileged place, or flee or abscond for
his personal security, or defend his person by force, and who shall
afterwards be found, by sentence of the lords of session, to be insolvent.
Bankruptcy as thus defined was, it is said, intended to afford a remedy
against fraudulent preference by debtors, and not as the ground-work of a
general process of distribution, although by later statutes it became a
necessary requisite of every such process. The exceptions recognized in the
act of 1696, of persons absent from Scotland and therefore not liable to
imprisonment, or of persons exempted therefrom by special privileges, were
removed by later legislation. The old English distinction between traders
and non-traders, it will be observed, is not recognized in Scottish law.
The statute made null and void all voluntary dispositions, assignations and
other deeds made after or within sixty days before bankruptcy.
In 1856 was passed the Bankruptcy (Scotland) Act, by which the law of
bankruptcy in Scotland is mainly regulated. By this act, notour (_i.e._
legally declared) bankruptcy was constituted:--
1. By sequestration (or adjudication in England and Ireland); and
2. By insolvency concurring either--(a) with a duly executed charge for
payment or (b) with sale of effects belonging to the debtor under a
poinding or under a sequestration for rent, or making application for the
benefit of _cessio bonorum_.
Notour bankruptcy continues, in cases of sequestration, until the debtor
has obtained his discharge and in other cases until insolvency ceases.
Sequestration may be awarded of the estate of any person in the following
cases:--
1. Living debtor subject to jurisdiction of Scottish courts--(a) on his own
petition with concurrence of qualified creditors, or (b) on petition of
qualified creditors, provided he be a notour bankrupt, and have had a
dwelling-house or place of business in Scotland within the previous year.
2. In the case of a deceased debtor, subject at his death to the
jurisdiction of the court--(a) on the petition of his mandatory; or (b) on
the petition of qualified creditors (s. 13).
Sequestration may be awarded either by the court of session or by the
sheriff. A sequestration may be recalled by a majority in number and
four-fifths in value of the creditors, who may prefer to wind up the estate
by private arrangement. If the sequestration proceeds, the creditors hold a
meeting, and by a majority _in value_ elect a trustee to administer the
estate, and three commissioners (being creditors or their mandatories) to
assist and control the administration and declare the dividends. The
bankrupt (under pain of imprisonment) must give all the information in his
power regarding his estate and he must be publicly examined on oath before
the sheriff; and "conjunct and confident persons" may likewise be examined.
The bankrupt may be discharged either by composition or without
composition. In the latter case (1) by petition with concurrence of all the
creditors, or (2) after six months with concurrence of a majority and
four-fifths in value of the creditors, or (3) after eighteen months with
concurrence of a bare majority in number and value, or (4) after two years
without concurrence. In the last case the judge may refuse the application
if he thinks the bankrupt has fraudulently concealed his effects or
wilfully failed to comply with the law. This act was amended by the
Bankruptcy and Real Securities Act 1857, which deals with the cost of
competition for trusteeships; the Bankruptcy Amendment (Scotland) Act 1860,
which enables the court to recall a sequestration where it is more
convenient that the estate should be wound up in England or Ireland; and
the Bankruptcy Amendment Act (Scotland) 1875, which makes the wages of
clerks, shopmen and servants preferential claims for a period not exceeding
four months and an amount not exceeding L50, while the claims of workmen
are placed on a similar footing for a period not exceeding two months. Some
important changes were subsequently introduced, one of the principal being
that effected by the Debtors (Scotland) Act 1880, which abolished
imprisonment for debt, but which, like its English prototype (the Debtors
Act 1869), contains a series of important provisions for the punishment of
fraudulent bankrupts. Under these provisions the laws of the two countries
on that subject are practically assimilated, although some minor
differences still survive. One of the most important of these differences
is, that while the Scottish act makes the failure, within the three years
prior to the sequestration, to keep "such books and accounts as, according
to the usual course of any trade or business in which he (the debtor) may
have been engaged, are necessary to exhibit or explain his transactions" a
criminal offence, the English act contains no provision of an analogous
character; the non-keeping of such books being treated as a fact to be
taken into account in dealing with the debtor's application for his
discharge but not coming within the scope of the criminal law. On the other
hand, there are a few minor trading irregularities dealt with in the
English act which are not specifically included in that of Scotland.
Another important distinction is that under the Scottish act the same
offences may be treated differently, according as they are brought for
trial before the court of justiciary or a sheriff and jury, in which case
the maximum penalty is two years' imprisonment; or before a sheriff without
a jury, in which case the penalty is limited to imprisonment for a period
not exceeding sixty days. This distinction admits of a useful elasticity in
the administration of the law, having regard to the comparative importance
of the case, which is hardly possible under the English act.
Another most important modification of the law is effected by the Debtors