BANKRUPTCY IN SCOTS LAW In Scots law the term "bankruptcy" is not capable of any exact definition. Indeed, it has no technical legal meaning and may refer to any one of the three stages in the process of divesting a debtor of his property for the benefit of his creditors—insolvency, notour bankruptcy or sequestration.
Insolvency may be either "absolute" or "practical." Absolute insolvency arises when at a particular time a debtor's liabilities exceed his total assets; practical insolvency when a debtor cannot pay his debts as they fall due although he may not be insolvent in the absolute sense, for his assets when realized may exceed his lia bilities. Absolute insolvency is considered in questions relating to the validity of dispositions made by the debtor ; practical insol vency in questions between the debtor and his creditors.
Unlike the bankrupt in English law, a notour bankrupt is not deprived of his property but is only restricted as to his capacity to deal with it. The object is to prevent him from disposing of his assets to favoured creditors and to preserve his property for the whole body of his creditors.
Sequestration is the process corresponding to an adjudication in English law whereby a debtor is divested of his property for the benefit of his creditors.
In Scotland, as in England, the law of bankruptcy arose as a remedy against the frauds of debtors. By an Act of the Scottish parliament (1621) all gratuitous alienations made by a debtor at a time when he was "absolutely insolvent" to "conjunct and confi dent persons" (i.e., near relations or confidential friends and servants) are annulled in the interests of prior creditors. The onus of showing that value has been given or that the debtor was in fact solvent at the time of the alienation lies upon the person who received the property.
The Act of 1696, c. 5, defined a "notour bankrupt" and struck at preferences to creditors. Under it all voluntary dispositions made at or after notour bankruptcy or within 6o days before to any creditor by way of security for prior debts may be set aside at the instance of prior creditors. No proof of fraud or collusion is necessary and it is immaterial whether the debtor was or was not insolvent at the time of the disposition. This act does not affect any payment to a creditor made in the ordinary way of business.
Notour bankruptcy continues in case of a sequestration till the debtor obtains his discharge and in other cases until insolvency (i.e., practical insolvency) ceases (s. 7). The notour bankrupt is not divested of his property, for, as has been stated above, the object of notour bankruptcy is not to transfer the debtor's prop erty to his creditors but to preserve it in his hands for their bene fit. The effects of notour bankruptcy on preferences to creditors under the Act of 1696 have already been noted and in addition notour bankruptcy has the effect of equalizing diligences (i.e., executions of all kinds). Arrestments and poindings used within 6o days prior to the constitution of notour bankruptcy or within four months thereafter are ranked pari passu as if they had all been used of the same date (s. 1o).
of the estate of any person may be awarded in the following cases :—(i) in the case of a living debtor subject to the jurisdiction of the supreme courts of Scot land: (a) on his own petition with concurrence of creditors for not less than A50; (b) on the petition of a creditor or creditors for not less than £5o, provided the debtor be notour bankrupt and has within a year before the date of the presentation of the peti tion resided or had a dwelling-house or place of business in Scot land. (2) In the case of a deceased debtor who at the date of his death was subject to the jurisdiction of the supreme courts of Scotland : (a) on the petition of a mandatory; (b) on the petition of a creditor or creditors for not less than £5o (s. 11).
A petition for sequestration may be made either in the court of session or in the sheriff court (s. 16), and a petitioning or concur ring creditor must lodge with the petition an oath as to the verity of his debt (ss. 20 and 21) . When the debtor presents or concurs in the petition sequestration must be awarded forthwith, the court having no discretion in the matter (s. 28). The interlocu tor (i.e., order of the court) awarding sequestration declares that the debtor's estate belongs to his creditors for the purposes of the act.
A meeting of creditors is next held to elect a trustee and the election is made by a majority in value of the creditors present. Each creditor must take an oath as to the verity of his debt, pro duce vouchers for it, and value and deduct any securities he holds. He is then entitled to vote on the balance (ss. 64 and 96). At the same meeting three commissioners are elected from the creditors or their mandatories (s. 72), and it is their duty to advise the trustee, audit his accounts, and declare the amount of dividends (s. 81).
The election of a trustee must be confirmed by an interlocutor of the sheriff and this interlocutor—called the "act and warrant" —vests the property of the debtor in the trustee for the benefit of the creditors (s. 70). Instead of electing a trustee the creditors may decide to have the estate wound up by a deed of arrangement. This requires the support of a majority in number and three fourths in value of the creditors present and must be approved by the lord ordinary or the sheriff (s. 34).
Sequestration is declared by s. 104 of the act to be equivalent to an arrestment in execution and decree of forthcoming and to an executed and completed poinding. No arrestment or poinding i.e., no process of execution—executed of the funds or effects of the bankrupt on or after the 6oth day prior to the sequestration is effectual, and any funds or effects attached must be given up to the trustee.
After the trustee's appointment has been confirmed the sheriff names a day for the public examination of the bankrupt (s. 83) and may order that the bankrupt's family and confidential servants be examined also (s. 86). Creditors lodge claims for ranking and must value and deduct their securities (s. 61). The trustee may require the creditor to hand over the security at the valuation he (the creditor) has placed on it. S. 118 contains a list of debts which are entitled to preference. The first dividend is paid at the end of six months from the date of the sequestration (s. 126), the second ten months from the sequestration (s. 128), and subse quent dividends, if any, at three-monthly intervals (s. 129).
Discharge.—The bankrupt may be discharged either on compo sition or without composition with his creditors. An offer of corn position may be made at the "meeting for election of trustee" or at any subsequent meeting, and if it is to be accepted it must be approved by a majority in number and three-fourths in value of the creditors present and finally by the lord ordinary or sheriff (ss. 134 to 142).
If no composition is made, the bankrupt may petition for his discharge (1) at any time with the concurrence of all creditors, (2) after six months with the concurrence of a majority in num ber and four-fifths in value of the creditors, (3) after 18 months with the concurrence of a majority in value and number, and (4) after two years without any such consents (ss. 143 to 149). The petition for discharge cannot be presented until the trustee has prepared a report of the bankrupt's conduct.
No discharge can be given whether with or without composition unless it is proved to the lord ordinary or the sheriff that a divi dend of five shillings in the pound has been paid or that the fail ure to pay such a dividend is due to circumstances for which the bankrupt is not responsible (s. 146). The debtor by the discharge is free from all debts except debts due to the Crown and certain other obligations. After a final division of the funds the trustee is entitled to his discharge whether the bankrupt has been dis charged or not (s. 152).
The act also contains certain provisions for the punishment of bankruptcy offences (s. 178). It should be noted that failure to keep proper books will constitute such an offence.
The estate of an insolvent debtor may be wound up without a sequestration by a private trust deed for creditors. The Act of 1913 does not provide for this remedy and it depends upon the common law of Scotland. In such a trust deed the debtor conveys his property to a trustee with accession of some or all of his credi tors. The trustee makes good his title to the property in the same way as any private person and then proceeds to divide the prop erty. The trust deed may be reduced as a preference to creditors under the Act of 1696 if some creditor who has not acceded to it makes the debtor notour bankrupt within 6o days of the trust deed, and if sequestration is awarded the trust deed automatically falls. There is no provision in Scotland for the registration of private trust deeds.
The law is regulated by the two leading statutes of 1857 and 1872, together with the Irish Debtors Act 1872, and corresponds in its main features to some of the older English enactments, with modifications adopted from the English Act of 1869. A special act was passed in 1888 for establishing local bankruptcy courts in certain districts in Ireland, and an Act of 1889 applied the main provisions of the English Act of 1888, relating to preferential payments in bankruptcy, to Ireland.
In 1897 the court of bankruptcy was abolished and its jurisdic tion was vested in the queen's bench division of the supreme court of judicature in Ireland.
The Deeds of Arrangement Act 1887, though repealed as to England by the Deeds of Arrangement Act 1915, is still in force in Ireland and is supplemented by the Irish Deeds of Arrangement Amendment Act 1890. This last mentioned act requires the regis tration of all petitions for arrangement under the Bankruptcy Act British Empire.—Of recent years great progress has been made in the consolidation of the law in the various parts of the British empire and especially is this the case with regard to the laws of bankruptcy. In Australia a consolidating act was passed by the commonwealth parliament in 1924 (Bankruptcy Act 1924, No. 37 of 1924) but its operation was suspended until a date to be fixed by proclamation. In New Zealand the law is consolidated by the Bankruptcy Act 1908 (Consolidated Statutes 1908, No. I2) . All of these statutes follow closely the English Bankruptcy Acts. In South Africa the consolidating statute of the Union par liament is the Insolvency Act 1916 (No. of 1916), which applies to the Cape of Good Hope, Natal, Transvaal, and the Orange Free State. In Canada the Dominion parliament passed the Bankruptcy Act of 1919, subsequently amended by Acts of 1920, 1921, 1922, 1923 and 1925.
There are two systems of insolvency law in force in India to-day, one applicable to the presidency towns and the other to the rest of the country. The first depends on the Presidency Towns Insolvency Act 1909 (Act III. of 1909) as amended by Acts X. of 1914, XI. of 1921, IX. and XXXIV. of 1926 and XI. and XIX. of 1927, and the second on the Provincial Insolvency Act 1920 (Act V. of 1920) as amended by Acts XIX. of 1925, IX., XXXIV. and XXXIX. of 1926 and XI. and XII. of 1927. Here again the English law has been the model.
The Indian Provincial Insolvency Act has been used as a con venient code of bankruptcy law for new colonies or territories. In Kenya Protectorate, for example, the Indian Provincial Insolvency Act 1907 was adopted as law by an Ordinance of 1910 (cap. Io6) and still remains in force, although a separate code superseding the Indian Act was set out in the Bankruptcy Ordinance 1926 (No. I of 1926) which will come into force on a date yet to be fixed.
In other parts of the British empire English law is adopted spe cifically. For example, in Tanganyika territory by the Bankruptcy Ordinance No. 8 of 192o English bankruptcy law as at the date of the ordinance is declared to be the law of the territory. In British Guiana, Gambia, Jamaica, Hong Kong, Mauritius, Grenada, Trini dad, Tobago, and the Straits Settlements the law is modelled on the English pattern.
France.—Bankruptcy in France is regulated by the Commercial Code of 1807, amended and supplemented by the law of June 9, 1838. By Article 43 7 of the code bankruptcy is defined as the state of a trader who is unable to meet his commercial engagements. Simple insolvency of this kind is known in France as faillite. Insolvency attended with circumstances of misconduct or fraud is known as banqueroute simple or banqueroute frauduleuse. Only a trader can become bankrupt. The debt, too, for obtaining adjudi cation must be a commercial debt, the laws regulating bankruptcy being designed exclusively for the protection of commerce. To be made a bankrupt a trader need not be insolvent ; it is sufficient that he has suspended payment. Commercial companies of all kinds are liable to be declared bankrupt in the same manner as individual traders. A trader-debtor can be adjudicated bankrupt upon his own petition, or upon the petition of a creditor, or by the court itself proprio mote. A petitioning debtor must within 15 days file at the office of the tribunal of commerce of the district a declara tion of suspension, with a true account of his conduct and of the state of his affairs, showing his assets, debts, profits and losses, and personal expenses. On adjudication the tribunal of commerce appoints a person, called a syndic provisoire, to manage the bank rupt's estate, and a juge commissaire is also named to supervise the syndic. A bankruptcy terminates by an ordinary composition (concordat), a sale of the debtor's assets (union), or a composi tion by relinquishment of assets. It is a striking feature of the French system, and highly creditable to French commercial integ rity, that a discharge in bankruptcy, even when accompanied by a declaration d'excusabilite, leaves the unpaid balance a debt of hon our. At the time of the French Revolution the National Conven tion passed a resolution that any man who contracted a debt should never be free from liability to pay it. The spirit of this resolution still survives, for until a trader has paid every penny that he owes he is not rehabilitated and remains under the stigma of various disabilities; he has no political rights, he cannot hold any public office, or act as a stockbroker, or sit on a jury. Banque route simple is where the bankrupt has been guilty of grave faults in the conduct of his business, such as extravagance in liv ing, hazardous speculation, or preferring creditors. Banqueroute frauduleuse involves the worse delinquency of fraud. Both ban queroute simple and banqueroute frauduleuse are punishable—the latter with penal servitude which may range from five to as many as twenty years. (See The Commercial Laws of the World, vol. xxi. p. 132 et seq.) Germany.—Bankruptcy in Germany is governed by a code passed in 1877, as amended by a Supplementary Law dated May 17, 1898. Prior to this each State had its system and the law was "wholly chaotic." The same distinction is drawn in Germany as in France between mere commercial failure and bankruptcy, simple or fraudulent. Simple bankruptcy is established by such offences as gambling, dealing in "futures," disorderly book-keeping or extravagance in living; fraudulent bankruptcy, by offences of a deeper dye—the concealment of property, the falsifying of books, the manufacture of fictitious debts, and the giving of illegal pref erences. Both kinds of bankruptcy are punishable, fraudulent bankruptcy by penal servitude or, in case of mitigating circum stances, by imprisonment for not less than three months. Acces sories in fraudulent bankruptcies are liable to penal servitude—for instance, a creditor who conspires with the debtor to secure an advantage to the prejudice of the other creditors. The creditors are called together within one month from the date of adjudica tion, and at their meeting they may appoint a committee of their number to advise with the trustee. It is the duty of the court to see that the trustee performs his functions. Estates are liquidated with great rapidity. In order that the creditors may receive divi dends at the earliest moment it is customary to sell the assets by auction. The creditors by a majority in number and three-fourths in value may accept a composition, but such an arrangement must have the approval of the court. The fees are very moderate : in an ordinary bankruptcy the attorney's fees do not, it is said, exceed £5. (See The Commercial Laws of the World, vol. xxiv. p. 265 et seq., where an exhaustive statement of the German law of bank ruptcy will be found.) Italy.—Bankruptcy in Italy is regulated by the Commercial Code of 1883 (Part III.). Only traders can pass through the bank ruptcy court. Traders are defined by the code as those who, as an habitual profession, engage in commercial business. This defini tion includes merchant companies. Bankruptcy proceedings may be taken either by the debtor or by a creditor for a commercial debt, or may be ordered by the court. The amount of the debt is immaterial: a small sum will suffice, provided its non-payment is proof of insolvency. Bankruptcy can only be declared where there is insolvency. The judgment adjudicating a debtor bankrupt de prives the bankrupt of the right to administer his affairs and nom inates a trustee to realize the property under the superintendence of a judge and a commission of creditors. All the property of the bankrupt, movable and immovable, is sold by auction and distrib uted in dividends. This is one way of closing the bankruptcy, but it may also be closed by an arrangement. No minimum percentage is required for such arrangement, but it must have the assent of creditors representing three-fourths of the bankrupt's indebted ness. Composition before bankruptcy is not recognized by Italian law. Bankrupts are liable to criminal proceedings involving pun ishments more or less heavy for offences against the law, e.g., for not keeping books in the way prescribed by law.