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Individual Insolvency & Bankruptcy in England – an English Eccentricity

di - 5 novembre 2013
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The purpose of this essay is briefly to examine the phenomenon of individual insolvency and bankruptcy in England, unknown in other mainstream and evolved jurisdictions[1]. Modern English individual insolvency, in contrast to corporate and business insolvency, has its own law, carefully upheld by specialist courts. The first part of the essay is a brief legal history of the concept[2]; the second part is a short analysis of the modern law of individual insolvency.

Preamble
This essay concerns the law of England and Wales. It does not discuss the law of Scotland or that irritating, modern misnomer, “UK law”. The concept of insolvency is a commercial rather than a legal one, although used by lawmakers and lawyers. It describes a factual state of a debtor’s inability to pay his debts. How to identify insolvency is a matter of fact and is sometimes the matter of considerable argument. The traditional method is to ascertain whether the debtor’s assets exceed his liabilities. This is called the balance sheet test. Another test, called the cash flow test, is to ascertain, objectively, whether a debtor is able to meet his obligations at the time they fall due.
The concept of bankruptcy[3], however, is a legal one and the term can be traced in English statute to 1542. Bankruptcy is a legal state of being, brought about by a legal process. The modern definition of a bankrupt is “an individual who has been adjudged bankrupt…”[4]. In England and Wales, it is only possible for a person to be bankrupt when a Court has made that adjudication in a Bankruptcy Order. As a matter of logic, a person may be (commercially) insolvent but not (legally) bankrupt because it is possible to be unable to meet financial obligations without a Court adjudicating bankruptcy. (Only individuals can be adjudicated bankrupt in England. The equivalent for companies is liquidation. There is no such thing as a “bankrupt company”)[5].
Readers need not be reminded that English law emanates from three main sources: statutes, (passed by Parliament in its “Acts” and other related legislation), the common law and equity, which is the law developed by the Courts.
I shall refer to a bankrupt person as “he”. This is largely for convenience, although it is notable that for most of English legal history, women (unless they traded) were incapable of being adjudicated bankrupt. It was not until 1935 that married women could become bankrupt in England[6].

Brief History of English Bankruptcy Law
As Fletcher has observed[7], throughout Europe in the Middle Ages, the lex mercatoria influenced commercial practice. Deriving ultimately from Roman law, used and spread throughout Europe by Italian merchants, it was helpful, adaptive and trusted. Lex mercatoria possessed concepts such as cessio bonorum, distractio bonorum, remissio, dilatio and so on, presenting to its adherents what could loosely be called an “insolvency law”, protecting both debtors and creditors alike. It was a creature of commerce.
The inherently dynamic and developmental common law, introduced by Edward I (1239 – 1307) in his reforms of English law and justice, was initially resistant to lex mercatoria. However, from the fourteenth century, the English Courts Merchant and Courts Maritime, which administered lex mercatoria, were absorbed into the English common law. It would be naïve to think that commercial law and practice did not, in some way, influence the development of English law. The common law permitted creditors to seize debtors, as well as their goods. The goods could be sold to meet liabilities. The unwelcome notion of being physically restrained by creditors, as well as having to face the responsibilities of unpaid debts, doubtless led many debtors then, as now, to absconding.
Towards the end of the reign of Henry VIII (1491 – 1547), while that aging Tudor monarch was married to his fifth wife, the legal concept of individual bankruptcy emerged from the other source of English law – statute. The founding statute for individual insolvency law (still confined to traders) is Statute 1542, “An Act against such persons as to make bankrupts”. The statute was concerned with absconding commercial debtors and sought to protect creditors. Underpinning the statute was the belief that deliberately avoiding an obligation to pay a trade debt was irresponsible and unacceptable. Clearly creditor-oriented, the Act was passed in order to protect those injured by those tradesmen who, owing debts, tried to run away to avoid paying them. No protection of any kind was offered to the debtor. The Act allowed the seizure and sale of the absconding debtor’s possessions as well as their distribution among the creditors. Noticeable from that time was the perception, which survived in later centuries, that bankrupts were objects of opprobium, perceived as quasi-criminals. Two more statutes appeared in 1570, enabling the Lord Chancellor of England and Wales to order the seizure of the assets of an absconding trader and to arrange for them to be sold, the proceeds distributed to his creditors, pro rata in accordance with the size of the respective debts owed. Significantly, this power could only be invoked by a creditor; the debtor could not seek his own bankruptcy.
From the mid-sixteenth century, English bankruptcy law continued to develop but it still only applied to those who made, bought and sold goods (traders). Non-traders were subject to the brutal common law for proving and enforcing debts, which included seizure of a debtor and his goods and even the imprisonment of the debtor until he repaid his debts, as well as the sale of his possessions. It was not until the nineteenth century that non-traders were able to become bankrupt.

Note

1.  I am conscious that this subject could be the subject of a book, let alone a very short paper, and I am endeavouring to cover it for the benefit of those with little or no previous knowledge of the subject in only a few pages. Omissions and elisions are regrettably inevitable, but I am responsible for any errors.

2.  I have relied upon, and refer readers to, the excellent chapter on this subject in The Law of Insolvency by Ian Fletcher 4th edition 2009. I am also indebted to the excellent Historical Background to late twentieth century insolvency law contained in Chapter Two of the Cork Report (see below).

3.  Latin: bancus ruptus. Italian: banca rotta. English: “broken counter” or “broken trading table”

4.  Insolvency Act 1986 s.381

5.  The poetic metaphor “moral bankruptcy” has neither commercial nor legal meaning.

6.  Law Reform (Married Women and Tortfeasors) Act 1935.

7.  Supra footnote 2.

Pagine: 1 2 3 4


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