Encyclopaedia Britannica, 11th Edition, "Baconthorpe" to "Bankruptcy" / Volume 3, Part 1, Slice 2

by Various

For the convenience of readers who may require more detailed Summary of procedure. information, the accompanying summary of some of the more important provisions of the law relating to bankruptcy procedure is submitted. It must be borne in mind, however, that the subject is in some of its branches extremely intricate, and that both the law and the procedure are being constantly affected by a considerable body of judicial interpretation, while the acts also contain detailed provisions with regard to many questions incident to the administration of bankruptcy. A reference to the latest textbooks or competent professional advice will always be advisable for those who have the misfortune to be practically interested either as debtors or as creditors in bankruptcy proceedings.

The Deeds of Arrangement Act 1887, although not falling Deeds of arrangement. strictly within the scope of the bankruptcy law, may also, in consequence of its important bearing upon the question of insolvency in England and Wales, be here noticed. It has been pointed out that, under the Bankruptcy Acts of 1849 and 1861, non-official arrangements by deed between a debtor and the general body of his creditors were not only officially recognized, but were in certain circumstances made binding on all the creditors, including those who refused to assent to them. Under the act of 1869, although such deeds were no longer recognized or made binding on non-assenting creditors, the proceedings under the "liquidation by arrangement" and "composition" clauses were practically private arrangements by resolution instead of deed, and were proved by experience to be open to the same abuses. It has also been shown that under the act of 1883 no arrangements either by deed or by resolution have any force against dissenting creditors, unless confirmed after full investigation and approval of the bankruptcy courts. Private arrangements, therefore, cease to form any part of the bankruptcy system. But they are, nevertheless, binding as voluntary contracts between the debtor and such creditors as assent to them. Being, however, in the nature of assignments of the debtor's property, they are either deemed fraudulent if the benefit of the assignment is limited to a portion of the creditors, or, if it is extended to all they become acts of bankruptcy, and, like any other voluntary assignment, are liable to be invalidated if made within three months prior to the petition on which a receiving order is made against the debtor. Treated as voluntary assignments, which are not binding on those who do not assent to them, such arrangements, where honestly entered into and carried out by capable administration, in many cases form a useful and expeditious method of liquidating a debtor's affairs, and where the debtor's insolvency has been brought about without any gross misconduct they will probably always be largely resorted to. The danger attending them is that even in cases where the debtor has been guilty of misconduct, a private arrangement may be used to screen his conduct from investigation, while in many cases it may be made the medium for the concealment of fraudulent preferences. The absence of any independent audit of the trustees' accounts may also encourage or conceal irregularities in administration. Previous to 1887, however, much inconvenience arose from the fact that the execution of these private arrangements was frequently kept secret, and fresh credit was obtained by the debtor without any opportunity being afforded for the new creditors becoming acquainted with the fact that they were dealing with an insolvent person, and that in many cases they were simply supplying the means for meeting past obligations in respect of which the debtor had already committed default. The Deeds of Arrangement Act 1887 was therefore passed to compel the disclosure of such arrangements, by declaring them void unless registered within seven days after the first execution by the debtor or by any creditor. Registration is effected by lodging with the registrar of bills of sale at the central office of the Supreme Court a true copy of the deed and of every inventory and schedule attached thereto, together with an affidavit by the debtor, stating the total estimated amount of property and liabilities, the total amount of composition, if any, and the names and addresses of the creditors. Where the debtor's residence or place of business is outside the London bankruptcy district, the registrar is required to forward a copy of the deed to the registrar of the county court of the district where the debtor's residence or place of business is situated. Both the central and the local registers are open to public inspection on payment of a small fee and general publicity is secured by the action of various trade agencies, which make a practice of extracting and publishing the information for the benefit of those interested. By section 25 of the Bankruptcy Act 1890, every trustee under a deed of arrangement is required to transmit to the Board of Trade within thirty days of the 1st of January in each year an account of his receipts and payments and such accounts are open to the inspection of any creditor on payment of a small fee. They are not, however, subject to any kind of audit or control by the department. The registrar is also required to make periodical returns of the deeds thus registered to the Board of Trade, in order that a report of proceedings under the Deeds of Arrangement Act may be included in the annual report which the department is required to make on proceedings under the Bankruptcy Acts. Full statistics of such proceedings are accordingly included in these reports, from which it appears that during the ten years ended 31st December 1905 the total number of registered deeds of arrangement was 34,273, with estimated liabilities amounting to £41,663,541, and estimated assets to £23,020,483.

Summary of Bankruptcy Procedure.—Subject to certain special provisions in the case of what are termed "small bankruptcies" (see below), the following summary sets forth some of the more important provisions of the various acts and rules relating to bankruptcy administration grouped under convenient heads to facilitate reference. In some cases the effect of legal decisions has been embodied in the summary.

Preliminary Proceedings.

Petition and Receiving Order.—Any court exercising bankruptcy jurisdiction in the district in which he resides or carries on business

in England or Wales may make a receiving order against a debtor, whether a trader or not, either on his own petition or on that of a creditor or creditors whose claims aggregate not less than £50. In the case of a creditor's petition proof must be given of the debt, and of the commission of an act of bankruptcy within three months preceding the date of the petition. An act of bankruptcy is committed if the debtor fails to satisfy the creditor's claim upon a bankruptcy notice; if he makes an assignment for the benefit of his creditors generally; if he absconds or keeps house; if he gives notice of suspension of payments; if his goods are sold or seized under execution; if he files in court a declaration of inability to pay his debts; or if he grants a fraudulent preference or conveyance. These acts are here enumerated in the order in which they most frequently occur in practice.

Object and Effect of Receiving Order.—The object of the order is to protect the debtor's property until the first meeting of creditors, and to bring the debtor and his affairs within the jurisdiction of the court. Its effect is to stay all separate action against the debtor, and to constitute the official receiver attached to the court receiver of the debtor's property, although the legal title still remains in the debtor. Where there is an estate or business to be managed the official receiver may appoint a special manager, who receives such remuneration as the creditors, or failing them the Board of Trade, may determine. As a consequence of the order the following obligations are imposed upon the debtor:—He must make out and submit to the official receiver within a prescribed period a statement of his affairs, containing the names and addresses of his creditors, the amount of their claims and the securities held by them, and the nature and value of his assets; and accounting for his deficiency. Any material omission or false statement of his losses or expenses is a misdemeanour under the Debtors Act, unless he can prove that he had no intention to defraud. The statement is open to the inspection of creditors. He must also in every case submit to a public examination in court, in which the official receiver, the trustee and any creditor who has proved his debt may take part. His evidence may be used against him. He may further be specially examined by the court at any time with reference to his dealings or property. He must attend the first meeting of creditors, wait upon the official receiver, trustee and special manager, and give all necessary information, and generally do all acts which may reasonably be required of him with the view of securing a full investigation of his affairs. He may be arrested if there is reasonable ground for believing that he is about to abscond, destroy papers or remove goods, or if he fails without good cause to attend any examination ordered by the court. The court may also for a period of three months order his letters to be re-addressed by the post-office to the official receiver or trustee. With regard to persons other than the debtor, any person capable of giving information respecting the debtor, his dealings or property, may be examined by the court, and a summary order may be made against such person for delivery of any property belonging to the debtor.

First Meeting of Creditors.

This meeting is summoned by the official receiver, notice being given in the London Gazette and in a local paper, and sent by post to each creditor. A summary of the statement of affairs should accompany the notice, with any observations by the official receiver which he may think fit to make. The object of the meeting is to decide whether any proposal for payment of a composition or for a scheme of arrangement submitted by the debtor is to be entertained, or whether an application should be made to the court to adjudicate the debtor bankrupt. In the latter case the meeting may by an ordinary resolution appoint a trustee with or without a committee of inspection. It may also give any directions as to the administration of the estate. The meeting should be held at the place most convenient for the majority of the creditors. It is presided over by the official receiver or his deputy, who, subject to appeal to the court, admits or rejects proofs for the purpose of voting. For the transaction of business three creditors qualified to vote, or all the creditors if fewer than three, must be present or represented. Only persons who have proved their debts are entitled to vote, and detailed regulations respecting proofs and the valuation of securities are laid down in the first and second schedules to the act of 1883. One of the chief alterations in the law on this point is the condition imposed on creditors on bills of exchange to deduct from their claims the value of the liability of prior obligants before voting, thus cancelling the power of controlling the proceedings previously possessed by persons who had no real interest in the estate. Votes may be given in person or by proxy, and stringent regulations are laid down with the view of preventing the abuse of proxies. General proxies entitling the holder to exercise all the powers which the creditor could exercise if present may be given to the official receiver or to any person in the regular employment of the creditor. Special proxies may be given to any person to vote for specified resolutions, or for the appointment of specified persons as trustee and committee. Only official forms can be used, and the blanks must be filled up in the handwriting of the creditor or some person in his regular employment, including the authorized agent of a creditor resident abroad. A proxy must be lodged with the official receiver not later than four o'clock on the day before the meeting or adjourned meeting at which it is to be used. Resolutions are ordinary, special or extraordinary. An ordinary resolution is carried by a majority in value of the creditors voting; a special resolution by a majority in number and three-fourths in value of such creditors. The only instance of a resolution other than these is that required for the approval of a composition or scheme which requires a majority in number and three-fourths in value of all the creditors who have proved. The majority of questions arising at a meeting are decided by an ordinary resolution.

Adjudication.