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

by Various

Claims of Creditors and Dividends.

In the distribution of the debtor's property certain claims are entitled to priority over others. Thus the landlord, although not entitled to a preference out of the funds in the hands of the trustee, can distrain for unpaid rent on the goods and effects of the debtor remaining on the landlord's premises, but where the distraint is levied after the commencement of the bankruptcy this right is limited by the act of 1890 to six months' rent due before adjudication, the remainder of his claim ranking for dividend with the claims of other creditors. Various gas and water companies have also statutory powers of distraint under special acts, but the policy of recent legislation has been to discourage any extension of such privileges. Where the bankrupt holds an office of trust in any savings bank or friendly society, any balance in his hands due to such bank or society has been held under the acts relating to these bodies to be payable in preference to any other claim against the estate. Other preferential claims are regulated by the Bankruptcy Acts and by the Preferential Payments in Bankruptcy Act of 1888, and include taxes, parochial and other local rates for not more than one year, wages and salaries for four months, but not exceeding £50 (limited in the case of ordinary labourers and workmen to two months' wages not exceeding £25), and agricultural labourers' claims not exceeding one year's wages, if hired by special contract for payment of a lump sum at the end of a year. These claims are entitled to preference not only over funds in the hands of the trustee, but also over the proceeds of any distraint levied by the landlord within the three months prior to the receiving order, the latter in that case becoming a preferred creditor for the amount so paid. Articled clerks and apprentices may also be allowed repayment of a proportion of the premium on their unexpired agreements. On the other hand, usual trade discounts (exceeding 5%) must be deducted from traders' proofs, and the following claims are postponed until the general creditors are paid in full, viz. claims by a married woman for loans to the husband for the purposes of his business, claims for loans advanced to any person in business at a rate of interest varying with the profits, and claims for interest in excess of 5% per annum. Subject to these exceptions all debts proved in the bankruptcy must be paid pari passu. Any surplus after payment of 20s. in the pound and interest at the rate of 4% per annum, from the date of the receiving order, is payable to the bankrupt.

Proofs of Debt.—All claims and liabilities present or future, certain or contingent, arising out of obligations incurred before the date of the receiving order are provable in the bankruptcy, an estimate of the liability in the case of contingent debts being made by the trustee subject to appeal to the court. But demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable. A secured creditor if he proves must either surrender his security, or value the security and prove for the balance; and the trustee can thereupon, subject to the creditor's power in certain circumstances to amend the valuation, take over the security by paying the amount of the valuation, or may require it to be realized. He may be required by the creditor to elect which of these courses he will adopt, failing which the equity of redemption will vest in the creditor. For further regulations as to proofs, the time within which they must be lodged for voting and for dividend, and the manner of dealing with them, reference should be made to the first and second schedules of the act of 1883 and the rules relating thereto.

Dividends.—After payment of costs of administration and preferential debts, it is the duty of the trustee to distribute the estate with all convenient speed,—the first dividend within four months after the first meeting of creditors, and subsequent dividends at intervals of not more than six months, but the declaration may be postponed for sufficient reason by the committee of inspection. Notice of the intention to declare a dividend is gazetted and sent to each creditor mentioned in the bankrupt's statement of affairs who has not proved. The notice should state the last day for proving in order to participate in the distribution, and should be given not more than two months before the declaration. When the dividend is declared, notice of the amount due, and of the place where the same is payable, is sent to each creditor who has proved, with a statement showing particulars of the estate. And provision must be made for creditors at a distance, who have not had time to prove, for disputed claims, and for debts the subject of claims not

yet determined. Creditors who fail to prove before the declaration of a dividend are entitled to receive their dividends on proving before any subsequent dividend is declared, but cannot disturb the distribution of any dividend already declared. Before distributing a final dividend notice is sent to every creditor whose claim has been notified to the trustee, but not finally established, with an intimation that unless so established within a specified period he will be excluded from participation in the estate. In the case of a bankrupt firm the joint creditors are not entitled to receive a dividend out of the separate property of the bankrupts until all the separate creditors are paid in full.

Trustee's Administration.

While the interim preservation and management of the estate is conducted by or under the direct supervision of officers appointed by and responsible to the Board of Trade, the ultimate realization and distribution of the assets devolve upon the trustee appointed by the creditors. But besides acting as receiver prior to the first meeting of creditors, the official receiver also becomes trustee by operation of law on the making of an order of adjudication. He vacates the office when a trustee is appointed by the creditors, and certified by the Board of Trade, but again becomes trustee on the creditors' trustee being released, dying, resigning or being removed from office. As the bankrupt's property vests in the trustee for the time being, and passes from trustee to trustee by operation of law, and without any formal act of conveyance, the continuity of the office is thus secured.

Appointment of Trustee.—A trustee may be appointed by a majority in value of the creditors voting, at the first or any subsequent meeting, or the appointment may be left to the committee of inspection. In either case the appointment is subject to confirmation by the Board of Trade, who may object on the ground that the creditors have not acted in good faith in the interests of the general body, or that the person appointed is not fit to act, or occupies such a position in relation to the debtor, to any creditor, or to the estate, as makes it difficult for him to act with impartiality, or that in any previous case he has been removed from office for misconduct or for failure without good cause to render his accounts for audit. An appeal from such objection to the High Court lies at the instance of a majority in value of the creditors, but in the absence of an appeal it is fatal to the appointment. Before being confirmed, the trustee-elect must also furnish security to the satisfaction of the Board of Trade, and such security must be kept up to the amount originally fixed, or to such lesser amount as that department may require throughout the tenure of the trusteeship, failing which the trustee is liable to be removed from office. Where the creditors fail to appoint a trustee, the Board of Trade may do so, but such appointment may at any time be superseded by the creditors.

Removal.—The trustee may be removed by the creditors at a meeting summoned for the purpose without reason assigned, or by the Board of Trade for misconduct, or for incapacity or failure to perform his duties, or on either of the other personal grounds of objection to which the appointment is open. But the removal is in like manner subject to appeal at the instance of creditors. If a receiving order is made against a trustee he thereby vacates office. He may also, with the consent of a general meeting of creditors, resign, but his resignation does not operate as a release from his liability to account for his administration.

Powers and Duties.—The trustee is required to take immediate possession of the bankrupt's property, including deeds, books and accounts, and has the powers of a receiver in the High Court for the purpose of enforcing delivery. After payment of the costs of administration it is his duty to distribute the estate in dividends as speedily as possible. He may also, and with the sanction of the committee, or, where there is none, with that of the Board of Trade, carry on the business so far as is necessary to a beneficial winding-up, institute or defend legal proceedings, employ a solicitor to do any business previously sanctioned by the same authority, compromise debts and claims, raise money on mortgage, sell property on credit, or divide the estate where practicable among the creditors in its existing form. He may, without special sanction, but subject to any directions which may be given by the creditors in general meeting, or failing them by the committee, sell the property or any part of it for cash, including business goodwill and book debts, and either by public auction or private treaty, and generally exercise all the powers which the bankrupt might before adjudication have exercised in relation to the property, or which are by the Bankruptcy Act conferred on the trustee.