If the creditors so resolve, or if a composition or scheme of arrangement is not proposed by the debtor or entertained by the creditors, or if entertained is not approved by the court, or if without reasonable excuse the debtor fails to furnish a proper statement of his affairs, or if his public examination is adjourned sine die, the court adjudicates the debtor bankrupt and thereupon his property vests in a trustee, and, subject to the payment of the costs and fees of administration, is divisible among his creditors until all his debts are paid in full with interest at the rate of 4% per annum.
Effect on Bankrupt.—The bankrupt is bound to aid the trustee in his administration, and if he wilfully fails to deliver up any part of his property he is guilty of contempt of court. He is also liable to criminal prosecution under the Debtors Act if with intent to defraud he conceals or removes property to the value of £10 or upwards; or if he fails to deliver to the trustee all his property, books, documents, &c.; or if he knowingly permits false debts to be proved on his estate without disclosure; or mutilates, falsifies, destroys or parts with books or accounts; or attempts to account for his property by fictitious losses; or if within four months next before presentation of a bankruptcy petition, he obtains property on credit by false representation; or pledges or disposes of, otherwise than in the ordinary way of his trade, any property which has not been paid for; or by misrepresentation obtains the assent of his creditors to any agreement with reference to his affairs. He is also under the act of 1883, guilty of misdemeanour if before his discharge he obtains credit for more than £20 from any person without informing such person that he is an undischarged bankrupt. It is the duty of the official receiver to report any such facts to the court, and if the court is satisfied that there is a reasonable probability of conviction, it is required to order a prosecution which is then conducted by the director of public prosecutions.
Disqualifications.—A bankrupt cannot during his bankruptcy or until five years after his discharge, unless the bankruptcy is annulled or he obtains his discharge with a certificate by the court that the bankruptcy was caused by misfortune without misconduct, act as a member of the legislature, or as a justice of the peace, mayor, alderman, councillor, guardian or overseer of the poor, member of a sanitary authority, school, highway or burial board, or select vestry in any part of the United Kingdom.
Annulment.—An order of adjudication may be annulled if the court is of opinion that it should not have been made, or that the bankrupt's debts are paid in full, or if a composition or scheme of arrangement is approved by the court after adjudication.
Discharge.—The court may also at any time after the conclusion of the bankrupt's public examination, and after hearing the official receiver, the trustee and any creditor, to all of whom previous notice of the application must be given, grant the bankrupt a discharge either absolutely or under conditions, but subject to the following qualifications, viz.:—(1) If the bankrupt has committed a criminal offence connected with the bankruptcy, the application must be refused unless for special reasons the court determines otherwise. (2) If the assets are not equal in value to ten shillings in the pound of the unsecured liabilities (unless the bankrupt can show that he is not responsible); or if proper books have not been kept; or if the bankrupt has traded after knowledge of insolvency; or has contracted debts without reasonable probability of payment; or failed to account for his deficiency; or contributed to the bankruptcy by rash speculation, gambling, culpable neglect or by unjustifiable expenses; or has taken or defended legal proceedings on frivolous grounds; or has within three months preceding the receiving order given an undue preference; or has increased his liabilities with the view of making his assets equal to ten shillings in the pound; or has previously been bankrupt or made an arrangement with creditors; or has been guilty of any fraud or fraudulent breach of trust; then the court shall, on proof of any of these facts, either (a) refuse the discharge, or (b) suspend it for a period of not less than two years, or until a dividend of not less than ten shillings in the pound has been paid; or (c) qualify the order by the condition that judgment is entered up against the bankrupt for payment of any unpaid balance of his debts, or of part of such balance out of his future earnings or property. The bankrupt may, however, after two years apply to the court to modify the conditions if he is unable to comply with them. An order of discharge releases the debtor from all his obligations except debts due to the crown, and other obligations of a public character which can only be discharged with the consent of the Treasury, debts incurred by fraud, and judgment debts in an action for seduction or as a co-respondent in a matrimonial suit or under an affiliation order, which are only released to such extent and subject to such conditions as the court may expressly order. The release of the bankrupt does not operate as a release
of any partner or co-obligant with him. Neither does it release the bankrupt from liability to criminal prosecution.
Composition or Scheme of Arrangement.
After a receiving order has been made the debtor may submit a proposal for the payment of a composition, or for the liquidation of his affairs, by a trustee or otherwise, without adjudication. The proposal must be lodged with the official receiver in sufficient time to allow notice, together with a report by that officer, to be sent to the creditors before the meeting is held at which it is to be considered. If the proposal is entertained at the meeting by a majority in number and three-fourths in value of all the creditors who have proved their debts, and if it is thereafter approved by the court, it becomes binding upon all creditors who would be bound by an order of discharge had the debtor been adjudicated bankrupt. A similar proposal may be made after adjudication, and if entertained by the creditors and approved by the court, the adjudication may be annulled. The debtor's release will be subject to the terms of the scheme, but his future acquired property will not pass to the creditors unless there is an express stipulation to that effect. If default is made in carrying out the scheme, or if it is found that it cannot proceed without injustice or undue delay, the court may at any time adjudicate the debtor bankrupt, in which case the scheme will fall to the ground, except in respect of past transactions under it. The approval of a composition or scheme does not release the debtor from his liabilities under the criminal law, nor from the necessity of undergoing a public examination which must, in fact, be held and concluded before the approval of the court is applied for. Also before such approval is given a report must be filed by the official receiver upon its terms and on the conduct of the debtor, and the court must be satisfied after hearing that officer and any creditor, that the proposal is reasonable and calculated to benefit the creditors, and that no criminal offences connected with the bankruptcy have been committed by the debtor. Further, if any fact is proved which would have prevented the debtor from obtaining an absolute or unconditional order of discharge had he been adjudged bankrupt, the composition or scheme cannot be approved unless it provides reasonable security for the payment of not less than seven shillings and sixpence in the pound on all the unsecured debts. Where a trustee is appointed to carry out the composition or scheme, all the provisions of the act with reference to the remuneration of the trustee, the custody of funds, the audit of his accounts and the control exercised by the Board of Trade apply in the same manner as they would under an adjudication. Further, the provisions relating to the administration of property, proof of debts, dividends, &c., will also apply, so far as the nature of the case and the terms of the arrangement admit.
Property divisible among the Creditors.
No part of the law of bankruptcy is more intricate, or has been the subject of more litigation than this, and any detailed view of the effect of legal decisions can only be gathered by a perusal of the cases; but the following general principles may be stated:—The term "property" includes not only property of which the bankrupt is the true owner, but property in his possession, order or disposition in his trade or business with the consent of the true owner, in such circumstances that he is the reputed owner thereof. The application of the doctrine of reputed ownership has been considerably restricted in recent years by the growth of alleged trade customs, in accordance with which property is frequently lent under a contract of "hire and purchase" or otherwise; and by the decisions of the courts that where such custom is sufficiently proved the doctrine does not apply. Further, the trustee's title not only includes property in the actual possession of the bankrupt, but relates back to the date of the first act of bankruptcy committed by him within the three months preceding the presentation of the bankruptcy petition, and thus invalidates all payments and assignments to creditors made during that period with knowledge on the part of the creditor or assignee of the commission of the act of bankruptcy. In such cases the trustee may, therefore, require the money or property to be restored to the estate. And even where no prior act of bankruptcy is proved, any payment made to a creditor with the view of giving such creditor a preference over the other creditors, within the three months preceding the presentation of the petition on which the payer is made bankrupt, is rendered void as against his trustee. Settlements of property within the two years preceding the bankruptcy, unless made before and in consideration of marriage, or made in good faith for valuable consideration, are also void, as are similar settlements within ten years, unless it is proved that the settlor was (independently of the settled property) solvent at the date of the settlement, and that the interest in the property passed to the trustees on the execution of the deed. The same rule applies to covenants to settle in consideration of marriage future-acquired property in which the debtor had no interest at the date of the marriage (other than property acquired by the bankrupt through his wife), if such property is not actually transferred before the bankruptcy. Executions by a creditor not completed at the date of the receiving order are also void, and the proceeds of an execution in the hands of the sheriff must, with certain exceptions and subject to deduction of costs, be handed over to the trustee. But all property held by the bankrupt on trust, and tools of trade, wearing apparel and bedding to a total value not exceeding £20, are excluded from the property divisible among the creditors. With respect to property acquired by the bankrupt, whether by gift or legacy, or consisting of accumulations of business or other profits after the commencement of the bankruptcy, and before he obtains his discharge, the trustee's title also prevails; but bona-fide transactions by the debtor for value, other than transactions relating to freehold property, appear to be valid. Where the bankrupt is a beneficed clergyman the trustee may, subject to certain provisions for the due discharge of the duties of the office, apply for the sequestration of the profits of the benefice; and where he is in receipt of a salary, income or pension, &c., the court may order any part thereof to be paid to the trustee, but where he is an officer of the army, navy or civil service, such order is only to be made with the consent of the chief of the department concerned.