Debtor's Welcome to their Brother
Debtor's Welcome to their Brother
This chapter emphasises that the Committee is interested in dealing with the Insolvency regime as a whole, as it applies to corporate and non-corporate entities. The main issue is how best to distinguish between different types of debtors, how the dishonest could be punished, and how the assets of debtors could be distributed in the fairest possible way.
This chapter surveys the evolution of Insolvency law beginning from the year 1542. It highlights the fact that up until 1705, the law favoured creditors and harshly punished, and even imprisoned, debtors. It was carrying out a disciplinary function. This harshness started to be mitigated, for example, in 1869 when, under the Debtor Act, the power of the courts to imprison debtors was curtailed. Yet the attempt, under the Bankruptcy Act 1869, to regard bankruptcy as a purely private matter was criticised for ignoring the public interest. It was clear that the law was in a very bad state.
In 1883, Parliament realised that although bankruptcy was not a crime, it required public explanation and inquiry. That lead to the passing of the Bankruptcy Act 1883, the underlying principle of which is that bankruptcy is a matter that affects the community at large. At the time of writing, the machinery of the Act underpinned the incumbent system of bankruptcy.
They system enabled creditors to have a private arrangement with the debtors, whereby the creditor would be allowed to run the debtor’s business. Under Deeds of arrangement, a debtor could contract out of the public inquiry system of the 1883 Act.
This procedure was designed to allow the courts to make an order for the administration of the debtor’s estate, and the payment of his debt. It was put in place to make the imprisonment of debtors much rarer.
Prior to the 19th century, the system was that of ‘great unincorporated partnerships’. The issue was that the doctrine of limited liability of shareholders was absent, which lead to a dependency on a single shareholder.
The floating charge over future assets was devised in the 1860s. The Departmental Committee praised the floating charge and said that it had become an ‘integral’ part of company finance and could not be abolished.
The second half of the document( at page 56 of the PDF file) includes an additional historical account of Bankruptcy. It also explains that the five objectives of Bankruptcy Act, the summary of which is to strike a fair balance between the rights of creditors and the welfare of the debtors, and also to punish fraudulent debtors. Bankruptcy procedure is also included.
At page 65, there is an additional historical account of Bankruptcy law , with a particular emphasis on the Acts.
As to companies, the current Acts deal extensively with the voluntary and compulsory winding-up of companies. While there is no difference between an individual operating in his own right, and a company with a single shareholder, there is a real difference following insolvency. This difference lead to an individual shareholder to be back in business again through another company. The document calls this the ‘corporate veil’.
On EEC, the report highlights that Insolvency Laws could benefit a great deal from EEC laws’ harmonisation, for example, were companies are subject to bankruptcy procedures in the same way as individuals.
The aim of modern law should not be to focus on the acts, culpable or otherwise, of a debtor, but to instead regulate the economic situation that arises out of the debtor’s financial condition. The document draws on the Blagden report, and says that rather than amending the current Acts in light of the recommendations, new comprehensive Acts should instead be introduced. The conclusion is on page 76 of the document.