Debtor's Welcome to their Brother
Debtor's Welcome to their Brother
This document introduces the huge task of the Insolvency Law Review Committee- to examine the area of law known as ”insolvency”, which is also called ”bankruptcy”. The Committee puts the interests of debtor at the core of its recommendations. First, it expresses, so far as it is predicable and just, a desire to apply the same principles to all kind of debtor. Second, it contemplates a larger involvement of society in insolvency proceedings, and seeks to measure the extent to which the interests of society are affected by putting debtors into insolvency.
Insolvency is the state of affairs whereby liabilities exceed current or future assets. This creates ‘credit’, which forms the basis of a ‘debtor-creditor’ relationship. Insolvency law is then concerned with what the right course of action should be when debtors cannot meet their obligations to their creditors when they become due. This question boils down to considerations of the debtors ‘assets’, the creditors ‘shares’, the indebted company’s offices and agents, and what society’s interests are in those conflicting needs?
The Committee asserts that the law under its review does not deal with these challenges satisfactorily. It is based on a century-old social and economic conditions, which, when applied at the time of writing the report, gave rise to anomalies, particularly in the field of justice.
This introduction highlights an important change in the behavior of individuals and corporations, namely an increased demand for credit. This led to a facilitation, and an increased acceptance, of the supply of credit. Yet it presented the risk that borrowers could over-reach themselves financially-or, in other words, borrow more than what they could afford. Further, the fierce competition between lenders led to the lowering of the constraints that ensure ‘good lending’. This, in turn, led to the situation where individuals could easily take credit they could not pay back, while leaving both creditors and debtors confused as to what the remedies should be to facilitate debt repayment.
The report highlights the importance of securities in that they guarantee the priority of a lender to acquire a repayment, yet they are not themselves a substitute to repayment. Securities facilitate the taking of larger debts, as well as lower the cost of financing them. Clearing banks could obtain a security by monitoring their borrowers’ financial affairs. Yet Smaller lenders tend to have a reduced capacity to do so compared with large banks. This means that they have a lesser security on the debt than their competitors.
While striving to facilitate the ability of borrowers to acquire credit, banks have on the other hand an obligation to their depositors. If a bank fails to meet its duty to pay its depositors, it will lose its ability to trade. The report asserts that constrains on credit should first be ‘self-imposed’ by banks themselves, even in the absence of external control.
A healthy banking system is vital for a prosperous society. The adoption of sound lending principles, coupled with not-too-relaxed credit repayment and security requirements are vital for society’s confidence in the banking sector. At the same time, the supply of credit is essential for enterprise to occur, and for the exchange of goods and services to take place. The report, therefore, emphasis that lenders have to strike a fair balance between their interests and those of society.
Parliament has the power to restrict the enforceability of credit transactions that are deemed unfair. A distinction must be made between the latter, and the enforceability of valid contracts. Yet consumerism-oriented society must also be held responsible for the encouragement of debt taking. The report highlights the historic growth of the debt business in society, and highlights that there are now ‘in-house finance’ as well as other lenders, which all encouraged consumer spending, and led to growth. Yet the governing law remains static.
The report therefore says that the law should on the one hand encourage healthy borrowing, while protecting the honest, but ill-informed borrower by taking them out of a debt situation which they could never put right. This will give ‘confidence for lenders to lend, while encouraging a reasonable desire to borrow. The legislature should not lose sight of the fact that creditors possess assets that belong to society as a whole, to which the debtor seeks access for his/her own interest, and from which the creditor could make profit. As such, to strike a fair balance between debtors and creditors would lead to fairness on society as a whole.