The Foundations of Bankruptcy Law

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 27-46

27

CHAPTER 2

THE FOUNDATIONS OF

BANKRUPTCY LAW

A. SHORT HISTORY OF BANKRUPTCY LAW

Blackstone clai med that the term bankruptcy was derived from the

Italian and signif‌ied that a t rader’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 w ithout a trace.2 Whatever its

origins, it is undeniable that bankruptcy law has a very long history.

Roman law contained procedures t hat were similar in f unction and

operation to bankruptcy proceedings.3 These were incorporated into

the law merchant — a body of law that drew upon the customs and prac-

tices of merchants.4 Although much of the law mercha nt was absorbed

into English commercial law, its inf‌luence on insolvency law was more

limited. Anglo-Canadian bankruptcy is overwhelmingly statutory i n

character. Its origins, growth, and development can be t raced through

a series of bankr uptcy statutes beginning in the sixteenth 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 Inst itutes of the Laws of England (London:

W. Clarke, 1817) at 266.

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

4 See L.E. Lev inthal, “The Early Histor y of English Bankruptc y” (1919) 67 U. Pa.

Law Rev. 1.

BANKR UPTCY A ND INSOLVENCY L AW28

1) The Development of English Bankruptcy Law

The f‌irst English bankruptcy statute was enacted in 1542 during t he

reign of Henry VIII. It was directed against debtors who attempted

to escape their obligations by either leaving the country or by stay-

ing within their homes, which effectively prevented the service of legal

process.5 The Act permitted a creditor to lodge a complaint before a

bankruptcy commi ssioner, who would summon the debtor. If the debt-

or 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 a ssets. Thi s early statute di splayed two

central features of bankruptcy law that have persisted to the pres ent

day. First, it created a summary and collective procedure th at operated

for the benef‌it of all the cred itors, and not simply for t he creditor who

initiated the proce ss. Second, it adopted a pro rata sharing principle in

respect of the distr ibution of the debtor’s assets among the creditors.

A more detailed bankruptcy statute was enacted in 1571 during the

reign of Elizabeth I.6 This statute created additional act s of bankruptcy

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

be adjudged bankrupt. The present Canadian bankr uptcy statute still

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

ruptcy proceedings, although some of the other common law countries

have dispensed with the concept a nd instead requi re 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 pow-

ers of enforcement against merchant debtors. However, it came to be

recognized that bank ruptcy law could produce extraordinary hardship

for debtors whose ships were lost at sea or whose losses were otherwise

caused by no fault of their ow n. Daniel Defoe, a merchant, journalist,

and pamphleteer who is most well known for his novel Robinson Cru-

soe, went bankrupt in 1691. His Essay upon Projects, wr itten i n 1697,

captures this sentiment. Defoe argues that bankruptcy law failed to dif-

5 34 & 35 Hen. VIII, c. 4.

6 13 Eliz. I, c. 7. The Fraudulent Conveyances Act, 13 Eli z. I, c. 5 was enacted in the

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

ances of propert y, remains in forc e as a received imperial st atute in many of the

Canadia n common law jurisdiction s.

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

mining whic h activities quali f‌ied a person as a trader and which d id not. See I.

Duffy, “English B ankrupts, 1571–1861” (1980) 24 Am. J. Legal Hist. 283.