Individual Insolvency & Bankruptcy in England – an English Eccentricity
As we have seen, both a debtor and a creditor may now petition for bankruptcy. In a real sense, each seeks a type of forensic protection by doing so. Bankruptcy has real advantages for the debtor. First, unmanageable debt is put under immediate control. A bankrupt is only obliged to repay “provable” debts, which excludes unproved or speculative claims, and includes only debts which have been approved by the trustee in bankruptcy with responsibility for managing the bankruptcy. Interest payments are frozen. Litigation is halted and cannot begin (or restart) without the Court’s permission. Personal and commercial pressure under which the bankrupt may have been living will be relieved when responsibility for his debts passes to the official responsible for administering his estate[23]. There will come a time when his bankruptcy will be lifted (normally one year) and he will have no more debts to pay. He will be given a new financial life. Of course, the social and commercial stigma which society can attach to bankruptcy will remain, and his credit rating will be poor or even non-existent. He may also have little or no property of his own. His name will be placed on the public Individual Insolvency Register.
While a bankruptcy order is in force (normally twelve months), the bankrupt must comply with “bankruptcy restrictions”. These include not: (i) borrowing more than £500 without informing creditors; (ii) acting as a director of a limited liability company; (iii) creating, managing or promoting a company without the permission of the Court; (iv) managing a business under a different name without disclosing that he is a bankrupt. A breach of these restrictions is a criminal offence. The restrictions can be extended if the bankrupt conducts himself carelessly or dishonestly while they are in force.
Conclusion
In the second quarter of 2013, there were 25,717 individual insolvencies in England & Wales. Of that number, 6,469 were bankruptcies, 7,132 Debt Relief Orders and 12,116 IVAs[24]. According to the Insolvency Service, the introduction of Debt Relief Orders in April 2009 has (with other factors) impacted on the number of bankruptcies.
The legal concept of individual bankruptcy has its very distant ancestor in mediaeval England, where perhaps its proto-ancestors came ultimately from Roman law. It was a child from the world of trade and commerce, although that changed over time. Gaining traction in the sixteenth century with Henry VIII, but still set aside for traders, the law gained more sophistication in the eighteenth century.
The intentions behind English personal insolvency legislation, which began timidly in the eighteenth century, grew in confidence throughout the nineteenth and matured in the twentieth, were justly and fairly to balance the rights of the creditors to recover their lawful entitlements with suitable protection for the bankrupt (and, by extension his dependents).
Fletcher observes[25] that the Act of 1542 evidenced two of the basic concepts of English insolvency law: the collectively (where the creditors act as one) and the distribution of the insolvent estate for the benefit of all the creditors, pari passu. These seminal concepts, expressly crudely in the sixteenth century, remain today, refined and purer. The eighteenth century legislation saw the introduction of bankruptcy as limited in time to protect debtors, and the nineteenth century introduced measures to protect those in debt (who were not only traders) by filing for their own bankruptcy as well as making the administration of the estate fairer and more transparent by placing greater Court control over those affairs.
It is submitted, however, that for the very brief reasons given above, one of the most significant steps to protect the individual from insolvency was the parallel development of the law of limited liability companies. That development overtly protected the personal wealth of individual shareholders from the creditors of a company which they owned, by limiting liability and developing the concept of individual corporate identity.
By the end of the nineteenth century, the foundation of modern insolvency law had been laid down. In 1986, English and Welsh insolvency law, as it is largely recognised and applied today, was put in place. EU law does not have a significant impact upon it. That legislation, with its numerous procedures designed to tackle problems connected insolvent individuals, endeavours to rehabilitate debtors, rather than punish them[26], seeks to place the administration and distribution of bankrupt estates in the hands of independent and accountable third parties, under the jurisdiction of the Courts, to ensure fairness to all and, wherever possible, endeavours minimise the personal, social and economic effects on bankruptcy both on the individual and wider social and commercial community.
Note
23. This is the trustee in bankruptcy. Normally, it is an official of the Office Receiver’s Office. That Office is part of the Insolvency Service, an Executive Agency of the British Government’s Department of Business Innovation and Skills. It is possible for a privately funded trustee to be put in place, who is suitably independent and qualified. See: www.bis.gov.uk/insolvency ↑
24. British Government figures. For these and historical statistics: www.insolvencydirect.bis.gov.uk/otherinformation/ststistics ↑
26. The British no longer imprison debtors for being in debt, but they will imprison bankrupts who act fraudulently in the bankruptcy process. ↑
