Personal Insolvency Law, Regulation and Policy

David Milman

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351911863
• Edition: 1
• Topic: Diritto
• Subtopic: Diritto fallimentare

As the radical reforms contained in the Enterprise Act 2002 have come fully on-stream, Personal Insolvency Law has become a major focus of attention. At the same time, all evidence points to increasing levels of personal debt with the consequential rise in bankruptcies. Personal Insolvency Law, Regulation and Policy therefore provides a timely evaluation of the current state of English law in this important area. The volume presents a critical analysis of the regimes of bankruptcy and individual voluntary arrangement in the context of current policy goals. It examines the impact of the Insolvency Act 2000 and the Enterprise Act 2002, and discusses the treatment of bankruptcy within the global economy. The book will be a valuable guide for students and academics engaged in the study of this increasingly important branch of private law. The study will also be of value to practitioners and policy makers.

Chapter 1

Surveying the Topography of Personal Insolvency and the Law

Bankruptcy as a Phenomenon

There is much ground to cover in this introduction so let us begin with terminology. The word “bankrupt” first appears in the English language vocabulary in the early part of the 16th century.¹ Whatever the etymological origins of the word, bankruptcy² has been a distinctive feature of English law and society for centuries since then. In recent decades for the most part it has remained low profile, occasionally rearing its ugly head for public debate when some well-known figure is declared bankrupt.³ In the previous centuries, however, it has been a central social/economic issue dominating political discourse and the legislative process.⁴ It has provided the basic plot for many literary and artistic productions⁵ and has led to the downfall of famous people.⁶ Bankruptcy no longer enjoys this celebrity status within the hall of fame of legal institutions. To some extent this devaluation is due to the advent of the limited liability company in the mid 19th century; much of the debate on liability and moral responsibility for debt has switched focus to that concept.⁷ The perceived success of Joseph Chamberlain’s 1883 Bankruptcy Act must also be seen as a factor behind the dampening of the debate. A hundred years on, is the regime of bankruptcy still working satisfactorily? Recent reforms indicate that bankruptcy once again is becoming a burning social issue.

The purpose of this monograph is to evaluate the current state of bankruptcy law in the light of the demands of changing socio-economic priorities. If one can view bankruptcy law as a product which the state offers to its citizens (and increasingly foreign customers) the fundamental question to be asked is whether it provides the optimum balance between promoting justice between the various stakeholders and achieving the goal of economic efficiency. When considering the bankruptcy regime it is necessary to identify the formative perceptions on the part of society. These have developed with the course of history. The original view was that bankruptcy was a state of affairs that was to be deplored and bankrupts were to be treated with the utmost severity. In more recent times a perception that is less based upon fault has evolved in influential circles. In many cases today bankruptcy is due to an inability to handle credit. If we accept that credit is an integral element in a modern capitalist society⁸ then we should recognise that bankruptcy is an inevitable consequence of dysfunctional credit-taking and an acceptable mode of discharging debts.⁹ Bankrupts should not be punished, but rather assisted to return to a position of financial stability and social productivity. This gentler view has been a significant influence on policy reform but it is not without its critics who argue that we should return to a stricter approach towards those who incur debt that they are unable to discharge.

Before embarking on our study we need to clarify a terminological dichotomy. Some commentators might view this as a distinction without a difference, but the terms bankruptcy and insolvency are not synonymous in English law. Historically separate regimes existed for traders (bankruptcy) and non-traders (personal insolvency) and even with the abolition of that formal distinction in 1869 differences remain. Indeed recent trends point to a growing re-emergence of that bifurcation. Insolvency is an economic condition that may lead to bankruptcy (which is a formal legal status). An individual cannot be declared bankrupt without being insolvent.¹⁰ Moreover, the concept of insolvency extends both to natural persons and companies. In English law (unlike many other jurisdictions) the law of bankruptcy deals only with individuals.

The Aim of Bankruptcy Law

The avowed purpose¹¹ of bankruptcy law is to provide a formal regime for the settlement of debt in circumstances where the creditor is unable to pay and where there exists a deficiency of assets. This bald explanation does not, however, address the underlying social goal. Blackstone, in his celebrated Commentaries of 1766, summarised the purpose of the law in terms of the desirability of promoting commerce by offering an unfortunate trader the opportunity to hand over his assets to creditors as an alternative to imprisonment.¹² Bankruptcy thus offered traders (and only traders) the opportunity of a fresh start free of old debt. Although the nature of the trade-off has changed in modern times (particularly with the advent of limited liability companies in 1855) the link between the bankruptcy regime and the promotion of commerce still holds true. Certainly, modern writers have highlighted the need for an enlightened bankruptcy law to cater for the inevitable casualties of the vicissitudes of commerce.¹³ The April 2000 government Consultative Document “Bankruptcy: A Fresh Start” took this as its initial premise. This consultation lead to the White Paper, “Insolvency: A Second Chance” ¹⁴ and ultimately to the major reforms embodied in Part 10 of the Enterprise Act 2002.¹⁵

Recent judicial expositions of the aims of bankruptcy law have provided a more rounded picture of its function. Thus in Storey v Lane, Gibbs CJ sitting in the High Court of Australia stated:

An essential feature of any modern system of bankruptcy law is that provision is made for the appropriation of the assets of the debtor and their equitable distribution amongst his creditors, and for the discharge of the debtor from future liability for his existing debts.¹⁶

Thomas Jackson, the leading American scholar, would argue that creditor protection is the prime role of the bankruptcy regime and that the function of the law should be to provide a cost-efficient mechanism for the recovery of debt that disrupts as little as possible pre-bankruptcy expectations:¹⁷

… the basic role of bankruptcy law is to translate relative values of non bankruptcy entitlements into bankruptcy’s collective forum with as few dislocations as possible.

This economic perspective draws support from the fact that bankruptcy can, for a group of creditors, reduce recovery costs and allow for the value of the estate to be maximised by preventing damaging “asset grabbing” actions by individual creditors. It is a strong part of Jackson’s philosophy that bankruptcy law should adopt a what we might describe as “minimalist” role by interfering with pre-bankruptcy rights as little as possible. This aspect of his thesis has generated fierce debate on the grounds that it is too conservative in preserving the contractual claims of secured creditors whilst ignoring other competing social values.¹⁸ Certainly, the Cork Committee would have no truck with the minimalist perspective (see Cmnd 8558, para 240). It is not part of this text to lend support to the narrow view on the proper role of insolvency law but rather to reflect the critical and wide ranging role of this regulatory regime.

Apart from promoting public order by taking control of this potentially fractious situation the state can offer favourable treatment to certain creditors.¹⁹ Paternalism thus makes an appearance in bankruptcy law.²⁰ In some senses, as the Cork Committee recognised (para 23), the existence of a bankruptcy regime is seen as a form of atonement by the state for allowing credit business to operate. The system also has subsidiary aims. There is clearly an aspect of post mortem written into the procedure to enable abuses to be identified and countered. The state additionally recognises the importance of rehabilitation, and although the idea of a “fresh start” seems to be a more recent innovation it does have a long pedigree. It is not in the long-term interests of society to leave a bankrupt a destitute and broken man. This humane and pragmatic point was well made at the start of the 20th century by Vaughan Williams LJ in Re Gaskell:

The overriding intention of the legislature in all Bankruptcy Acts is that the debtor on giving up the whole of his property shall be a free man again, able to earn his livelihood, and having the ordinary inducements to industry.²¹

From an economic perspective it is clearly in the interests of society that the bankruptcy system works efficiently. A system that swallows up net assets in administration costs whilst leaving little to distribute to creditors should not be tolerated. Unfortunately, the statistics show that depressing scenario to be the norm with unsecured creditors recovering only a pittance in many cases. Nor indeed should a system that relies too heavily on subventions from the public exchequer be permitted. Finally, the performance of the legal system in dealing with bankruptcy disputes needs to be scrutinised; unfortunately on occasions it has been found to be sadly lacking. For example in Mulkerrins v PricewaterhouseCoopers²² Lord Millett, commenting upon the plight of an individual embroiled in bankruptcy litigation, lamented:

… she has been shamefully ill-served by her former advisers, by the law of insolvency, and by the civil justice system.²³

In modern times the economics of bankruptcy have provided a powerful impetus for reform. The Cork Committee (Cmnd 8558, 1982, para 192) saw bankruptcy as an element in a social contract under which society protected bankrupts from harassment at the hands of their creditors and in return they offered up their assets and income to repay creditors, agreed to subject themselves to investigation and to accept disabilities for the duration of their bankruptcy.

Historical Development²⁴

Bankruptcy law in this jurisdiction has an ancient pedigree going back at least to the 16th century. Throughout that period it has been forced to adapt to changing economic conditions and new perceptions about social justice. In some senses bankruptcy law has become a mere tool of economic policy. The 1542 Act (34 and 35 Hen VIII, c. 4) is generally regarded as the first bankruptcy statute in English law.²⁵ It was specifically conceived as a criminal statute designed to combat debt evasion and apparently enacted to reassure traders having difficulty in recovering their debts from individuals who were skilled at avoiding payment. This was perceived as but one further aspect of the social problems posed by debt and poverty in Tudor England.²⁶ Unfavourable comparisons had been drawn with the debt recovery facilities available to merchants elsewhere in Europe. Another reason why bankruptcy legislation was deemed necessary was that the common law had failed to establish an adequate regime for dealing with debt recovery. Under English law a creditor could either seize the body of the debtor (pursuant to the writ of capias ad satisfaciendum) or the debtor’s assets, but not both. Imprisonment for debt was in fact not a creature of the common law, but a statutory manifestation that could be traced back to 1263.²⁷ As far as the seizure of assets was concerned, the governing maxim was that “the first in time prevailed”, a formulation that became a mantra in determining priorities. Unfortunately, the execution against assets option was inappropriate in the case of professional persons whose assets were in an intangible form (e.g. investments or future earning potential); the common law execution procedures (such as elegit or fieri facias) only worked in the case of land or tangible assets respectively with the result that debtors lacking such hard assets became prime targets for arrest.²⁸ The consensus amongst creditors was that the state was more interested in seeing debtors punished than providing an effective means for the recovery of debt. It was hardly surprising that this primitive self-help system was not conducive to good public order. Moreover, venerable rules on contractual consideration meant that arrangements whereby an individual creditor agreed to accept a lesser sum in discharge of a debt were not legally enforceable.²⁹ The 1571 legislation (13 Eliz I, c. 7) was more significant in terms of the future evolution of the bankruptcy paradigm. It introduced the concept of the act of bankruptcy and vested the management of the system in Bankruptcy Commissioners. The distinction between traders and non-traders, a pivotal aspect of bankruptcy law for the next three hundred years, dates back to this Act. The distinction ceased to operate under the terms of the 1861 Act (24 and 25 Vict, c. 124). In an Act of 1603 (1 Jac I, c. 15) the process of formally examining bankrupts was introduced. An important...