The Foundations of Bankruptcy Law

• Author: Roderick J. Wood
• Pages: 29-49

29

CHAPTER 2

THE FOUNDATIONS OF

BANKRUPTCY LAW

A. SHORT HISTORY OF BANKRUPTCY LAW

Blackstone claimed that the term bankruptcy was derived from the

Italian and signif‌ied that a trader’s bench had been broken.1 Coke be-

lieved that it came from the French and denoted a merchant who, along

with his trading bench, had disappeared without a trace.2 Whatever

its origins, it is undeniable that bankruptcy law has a very long his-

tory. Roman law contained procedures that were similar in function

and operation to bankruptcy proceedings.3 These were incorporated

into the law merchant — a body of law that drew upon the customs

and practices of merchants.4 Although 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 six-

teenth century.

1 Blackstone’s Commentar ies on the Laws of England, vol 2 (Oxford: Clarendon

Press, 1765–69) at 472.

2 Edward Coke, The Fourth Part of the Ins titutes of the Laws of England (London:

W Clarke, 1817) at 266.

3 I Fletcher, The Law of Insolvency (London: Sweet & Ma xwell, 1990) at 5–6.

4 See LE Levi nthal, “The Early History of Eng lish Bankruptcy” (1919) 67 Univer-

sity of Pennsylvania Law Re view 1.

BANKRUPTCY AND INSOLVENC Y LAW30

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.5 The 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 pro-

tection. 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 bankr uptcy statute was enacted in 1571 during the

reign of Elizabeth I.6 This statute created additional acts of bankruptcy

that were required to be proven by the creditors be fore the debtor could

be adjudged bankrupt. The present Canadian bankruptcy statute still

requires proof of an act of bankruptcy in respect of involuntary bank-

ruptcy proceedings, although some of the other common law countr ies

have dispensed with the concept and instead require proof that the

debtor is insolvent. The Act was also notable for its restriction of bank-

ruptcy to debtors who were merchants or traders.7 This 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 rec-

ognized th at bankruptcy law could produce extraordinar y 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, journal-

ist, and pamphleteer who is most well known for his novel Robinson

Crusoe, went bankrupt in 1691. His Essay upon Projects, written in 1697,

5 34 & 35 Hen VIII, c 4.

6 13 Eliz I, c 7. The Frau dulent ConveyancesAct, 13 Eliz I, c 5 was enacted i n the

same year. This st atute, which permits cred itors to set aside fraudulent convey-

ances of propert y, re mains in force as a received imp erial statute in many of t he

Canadian common law jurisdictions.

7 A sizeable por tion of bankruptcy law dur ing this period wa s devoted to deter-

mining whic h activities qualif‌ie d a person as a trader and which d id not. See

I Duffy, “English Ba nkrupts, 1571–1861” (1980) 24 American Journal of Legal

History 283.