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3. An Historical Perspective The 1883 and 1914 Acts. 3.1 Prior to 1883, the personal insolvency law of England and Wales was contained in a variety of Acts and in the common law. Insolvency was largely regarded as a criminal (or quasi-criminal) offence and remedies available to creditors included the seizure of a debtor’s goods or his arrest and imprisonment. Fraudulent traders who became bankrupt even faced the death penalty until well into the 18th century. Moreover, the bankruptcy laws as they stood only applied to traders. Non-traders who fell into debt faced prison if they did not have sufficient assets to satisfy their creditors. It was not until 1861 that both traders and non-traders came under the same system and only in 1869 were the powers of courts to imprison debtors reduced. 3.2 The great expansion of commerce and commercial credit that was a hallmark of the Victorian age led to calls for major reform of our insolvency laws. It was recognised that the "dire and uncertain consequences" of failure in business were a barrier to enterprise. The Bankruptcy Act 1883 sought to modernise the law and codify it into one regime. It came about as a response to public concerns and in particular the dissatisfaction with the administration of bankrupt estates, which were privately run and were haphazard affairs, open to considerable abuse. 3.3 The 1883 Act, which formed the basis of the modern bankruptcy system until the Insolvency Act 1986, was designed to ensure that an independent and impartial examination took place into the causes of each bankruptcy, as well as the conduct of each bankrupt. It recognised that bankruptcy should be regarded as a public matter, affecting the community at large. The public official responsible for the examination process was to be the Official Receiver. The Act was also intended to deal more effectively with misconduct by introducing a range of bankruptcy offences. 3.4 The Act also provided that all proceedings should be supervised by the Courts of Bankruptcy and that the bankrupt should undergo a public examination to reflect the public nature of bankruptcy. The public examination was a hearing in open court in which the bankrupt’s financial affairs were examined. Accordingly, an underlying feature of this Act and its 1914 successor was that although insolvency was not a crime, it indicated a state of affairs that required public explanation and enquiry. 3.5 The 1914 Act was seen as largely a tidying up operation and did not alter any material part of the system set up by the 1883 Act. The 1914 Act remained in force relatively unchanged until 1976. 3.6 Under the 1883 Act and the 1914 Act, the constraints imposed on the bankrupt were designed to ensure his co-operation in the administration of his estate as well as to prevent him from participating in some of the aspects of public life and from engaging in activities that required a degree of trust. This implied that the debtor, by the very fact of becoming bankrupt, was not someone in whom society could place its trust or confidence. 3.7 Applications for discharge could be made at any time following adjudication, providing that the public examination was concluded. The application itself was heard in open court. The Official Receiver submitted a report dealing with the history and the causes of bankruptcy, the bankrupt’s conduct and the results of the realisation of the bankrupt’s estate. One of the main objects of the report was to disclose to the court any conduct which, in the opinion of the Official Receiver fell within a specified list of ‘facts’ that comprise categories of misconduct set out in the 1914 Act. 3.8 The ‘facts’ included such matters as omitting to keep books of account, trading after the bankrupt knew he was insolvent, contracting any debt provable in the bankruptcy without expecting to be able to pay it, and contributing to his bankruptcy by "rash and hazardous speculation, or by unjustifiable extravagance in living, or by culpable neglect of his business affairs". If any such facts were found to exist, the court was precluded from granting an absolute discharge. 3.9 In practice, a bankrupt usually waited a considerable time before making an application, if he applied at all. Many bankrupts who had rearranged their lives to cope with their status were disinclined to have their conduct examined in public once again. Accordingly, a large proportion of the bankrupt population remained bankrupt for many years, sometimes for a lifetime. 3.10 Another notable feature of the 1883 Act and the 1914 Act was the ‘Certificate of Misfortune’, which represented an early attempt to distinguish between bankrupts on the grounds of their pre-bankruptcy behaviour. This was a provision that enabled the court to grant a discharged bankrupt a certificate that the bankruptcy was caused by "misfortune without any misconduct" on the bankrupt’s part. Certificates of Misfortune were rarely granted because of the strict definitions of misfortune applied by the courts which took the view that there was only "misfortune" where the bankruptcy was the result of some accident over which the bankrupt had absolutely no control. The 1976 Act. 3.11 The Insolvency Act 1976 introduced a type of automatic discharge and a review procedure. Section 7 of the Act introduced a limited automatic discharge, under which the court could make an order at the conclusion of the bankrupt’s public examination, if it thought it was appropriate, that the bankrupt would be discharged after five years. Otherwise, section 8 required the Official Receiver, to make an application for the discharge of the bankrupt within 12 months of the fifth anniversary of the adjudication. The Cork Report. 3.12 In 1977 the then Government commissioned a major review of the law relating to insolvency, bankruptcy, liquidations and receivership. The Cork Report1, published in 1982, was comprehensive in its scope and seen as far reaching in its recommendations. 3.13 Among other things, Sir Kenneth Cork and his review committee examined the basic objectives of insolvency law, stating that: "It is a basic objective of the law to support the maintenance of commercial morality and encourage the fulfilment of financial obligations. Insolvency must not be an easy solution for those who can bear with equanimity the stigma of their own failure…"2 3.14 The Report discussed the social and financial implications of insolvency, drawing a distinction between the consumer insolvent and the commercial insolvent, observing that the insolvency of a businessperson had much wider implications. 3.15 The Cork Report also identified two major objectives of insolvency law:
3.16 Cork also discussed the penal side of bankruptcy, suggesting the ‘stigma’ associated with it was motivated in the 19th century by a desire to maintain acceptable standards of conduct in the commercial community. The chain reaction that could be caused by the collapse of a business and the dislocation that followed was regarded as serious enough to require a degree of severity as a means of deterring other traders. The bankruptcy laws, according to Cork, were in large measure used as a medium for carrying out these disciplinary functions. 3.17 The discharge period was seen as a period to allow for the rehabilitation of the bankrupt. On this point, the Report supported an automatic review of the bankrupt’s position after five years, which would result in the discharge of the bankrupt unless the Official Receiver or the trustee put forward a strong objection. Nevertheless, the Report recommended that a bankrupt should still be free to apply for a discharge before this time, but not within 12 months of adjudication. In these cases the onus was on the bankrupt to prove that his discharge was warranted. 3.18 In its response to the Report3, the Government stated that it preferred to adopt an automatic discharge regime rather than retaining the then current system of applications after five years, citing considerable resource savings for both the Insolvency Service and the courts. A bankruptcy period of three years was preferred because: " …in a modern society the emphasis should be on the rehabilitation of debtors and that a three year period of restriction is sufficient for those who have failed financially."4 3.19 The Cork Report also recommended the introduction of new procedures for the administration of the affairs of insolvent debtors with a view to reserving bankruptcy to more serious cases where there was misconduct. The Report proposed a process of liquidation of assets to deal with less serious cases. Under this system the disabilities that applied to this category of debtor would have been less severe than for a bankrupt and it was proposed that the process would be completed and the debtor discharged within one year. 3.20 This recommendation was not taken forward. It was felt at that time that the level of inquiry required to determine the appropriate procedure for each debtor would place considerable additional demands on Official Receivers’ resources at a time when the government was seeking to effect a substantial reduction in the size of the Civil Service. In addition, the Government also felt that the (then) existing procedures, suitably modified, would allow the debtor "ample opportunity" to avoid bankruptcy if he or she was prepared to take active steps to that end. The 1986 Insolvency Act. 3.21 The changes relevant to this consultation introduced by the Act included:
3.22 In line with the approach recommended by the Cork Report, the sanctions and restrictions imposed by bankruptcy remained essentially the same, save for the introduction of the automatic discharge provision.
1 Insolvency Law and Practice. Report of the Insolvency Law
Review Commitee, 1982
[Foreword] [Responses To] [Executive Summary] [Section 1] [Section 2] [Section 3] [Section 4] [Section 5] [Section 6] [Section 7] [Section 8] [Section 9] [Annex A] [Annex B] [Glossary of Terms] |
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