A. Short History of Bankruptcy Law

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta

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Blackstone claimed that the term bankruptcy was derived from the Italian and signified that a trader’s bench had been broken.1Coke believed that it came from the French and denoted a merchant who, along with his trading bench, had disappeared without a trace.2Whatever its origins, it is undeniable that bankruptcy law has a very long history. Roman law contained procedures that were similar in function and operation to bankruptcy proceedings.3These were incorporated into the law merchant - a body of law that drew upon the customs and practices of merchants.4Although much of the law merchant was absorbed into English commercial law, its influence on insolvency law was more limited. Anglo-Canadian bankruptcy is overwhelmingly statutory in character. Its origins, growth, and development can be traced through a series of bankruptcy statutes beginning in the sixteenth century.

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1) The Development of English Bankruptcy Law

The first English bankruptcy statute was enacted in 1542 during the reign of Henry VIII. It was directed against debtors who attempted to escape their obligations by either leaving the country or by staying within their homes, which effectively prevented the service of legal process.5The Act permitted a creditor to lodge a complaint before a bankruptcy commissioner, who would summon the debtor. If the debtor did not appear, the debtor could be found to be outside the king’s protection. The commissioner could then break down the debtor’s door and seize and sell the debtor’s assets. This early statute displayed two central features of bankruptcy law that have persisted to the present day. First, it created a summary and collective procedure that operated for the benefit of all the creditors, and not simply for the creditor who initiated the process. Second, it adopted a pro rata sharing principle in respect of the distribution of the debtor’s assets among the creditors.

A more detailed bankruptcy statute was enacted in 1571 during the reign of Elizabeth I.6This statute created additional acts of bankruptcy that were required to be proven by the creditors before the debtor could be adjudged bankrupt. The present Canadian bankruptcy statute still requires proof of an act of bankruptcy in respect of involuntary bankruptcy proceedings, although some of the other common law countries have dispensed with the concept and instead require proof that the debtor is insolvent. The Act was also notable for its restriction of bankruptcy to debtors who were merchants or traders.7This limitation on the scope of the Act remained in place for almost three hundred years, until it was done away with in 1861.

The bankruptcy statutes provided creditors with enhanced powers of enforcement against merchant debtors. However, it came to be recognized that bankruptcy law could produce extraordinary hardship for debtors whose ships were lost at sea or whose losses were otherwise caused by no fault of their own. Daniel Defoe, a merchant, journalist, and pamphleteer who is most well known for his novel Robinson Crusoe, went bankrupt in 1691. His Essay upon Projects, written in 1697, captures this sentiment. Defoe argues that bankruptcy law failed to dif-

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ferentiate between the "Honest Debtor, who fails by visible Necessity, Losses, Sickness, Decay of Trade, or the like" and the "Knavish, Designing, or Idle, Extravagant Debtor, who fails because he has run out his Estate in Excesses, or on purpose to cheat and abuse his Creditors."8In 1705 bankruptcy legislation was passed to respond to this concern by introducing the concept of the discharge of a bankrupt.9Prior to this, a bankrupt remained liable for all amounts remaining unpaid to the creditors following the bankruptcy. The Act marks a key moment in the history of bankruptcy law. Although the original purpose behind the discharge may have been to offer an incentive for cooperation on the part of the bankrupt, the concept would ultimately expand and transform bankruptcy law. Bankruptcy would no longer be viewed solely as a powerful collection tool for creditors, but would be recognized as having an additional objective. Bankruptcy provides an honest bankrupt with a means of escaping the crushing burden of debt.

The bankruptcy discharge was afforded only to bankrupts who cooperated and assisted in the proceedings. The Act dealt harshly with uncooperative and fraudulent bankrupts through the imposition of capital punishment by hanging.10The death penalty for this offence was abolished in 1820, once it became widely apparent that the penalty was seldom exacted and therefore did not provide an effective deterrent.11The task of distinguishing between the honest but unfortunate debtor and the undeserving debtor who is responsible for the financial crisis is not always easy to do. Modern bankruptcy law continues to struggle to find proper techniques to achieve this purpose.

The nineteenth century is regarded as an era of sweeping law reform, and it is during this period that the law respecting remedies of creditors was fundamentally recast. By then, the restriction of bankruptcy to traders had produced two very different regimes. Merchants and traders were subject to bankruptcy proceedings. Against non-traders, unpaid creditors had to elect between one of two modes of collection. The creditor could seek to execute against the property of the debtor

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through seizure and sale of the debtor’s assets or against the debtor’s person through imprisonment of the debtor. Because of a number of technical difficulties in pursuing execution against property, creditors frequently elected to execute against the person. The Victorian reforms significantly improved the creditor’s remedies against the debtor’s property. During this period, imprisonment of the debtor was curtailed and finally largely abolished.12As a consequence, execution against property became the primary remedy of the creditor. The division between insolvencies of traders and non-traders was abolished in 1861, thereby extending the availability of bankruptcy to non-traders.13Bankruptcy law also underwent a series of significant reforms during this period. Many of the reforms were concerned with curtailing abuse of the bankruptcy system. At the beginning of the nineteenth century, the administration of the bankrupt’s assets was carried out by an assignee selected by the creditors. This produced a "continual danger of negligence or fraud or both."14The administration by the 700 commissioners who oversaw the bankruptcy system was chaotic, and they were unable to exert any effective control to counter these abuses. In 1831 a policy of official administration was adopted under which official assignees appointed by the lord chancellor had control over the management of the bankrupt estate.15

The reforms failed to produce a suitable bankruptcy system, and they were criticized by various segments of the business community. The dissatisfaction stemmed chiefly from the high administrative costs that substantially eroded the assets available for distribution to the creditors. In 1869 the official assignee model was scrapped in favour of the reinstitution of creditor control.16This was soon regarded to be a disastrous failure. In some cases, a minority of creditors would take control of the bankruptcy administration and improperly sacrifice the interests of the other creditors for their own benefit. Sometimes the debtor would obtain control of the process through the use of confederates and fictitious creditors, and then drain the assets through

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exorbitant trustee and solicitor fees.17Bankruptcy was in danger of "degenerating into a scramble" between debtors and creditors.18The English Bankruptcy Act, 188319discarded the pure creditor-control model...

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