Encyclopaedia Britannica Volume 3, Part 1, Slice 2 Part 43

[Sidenote: Inquiry of 1906.]

It would be out of place in this article to attempt to answer the question how far later legislation has solved the difficult problems which prior to 1883 were found so intractable, but it may be mentioned that in 1906 the Board of Trade appointed a committee to inquire into and report upon the effect of the provisions of the laws in force at the time in the United Kingdom in relation to bankruptcy, deeds of arrangement and composition by insolvent debtors with their creditors, and the prevention and punishment of frauds by debtors on their creditors, and any points and matters upon which the existing laws seemed to require amendment. The committee received a vast amount of evidence as well as doc.u.ments and memoranda from chambers of commerce, trade protection societies and influential public bodies. The scope of the inquiry was not limited to English law and procedure, but also embraced that of Germany, France, Australia, Scotland and Ireland. The report of the committee was issued in 1908 (Cd. 4068), and reference may be made to it for much valuable information. The committee reported that the result of their inquiry did not disclose any dissatisfaction on the part of the commercial community with the main features of the existing law and procedure. But there were certain special incidents of the law and branches of its administration upon which the committee made recommendations. One was the prosecution and punishment of debtors who had committed fraud on their creditors or caused loss to them by improper and reckless trading.

The existing procedure was complained of as being dilatory, c.u.mbersome and expensive, and the committee were of an opinion that where a debtor had committed an offence for which he could and ought to be prosecuted, prosecution and conviction, with adequate punishment, ought to follow speedily and decisively, and the chief recommendation of the committee was that, while the existing procedure should be left untouched, offences ought also to be punishable on summary conviction before magistrates and justices, and the provisions of the Summary Jurisdiction Acts applied to them, and that where an order for a prosecution is made on an application by the official receiver of a bankruptcy court and based on his report, that court should have power to order the official receiver to conduct the prosecution before the court of summary jurisdiction. The committee also reported that numerous delinquencies by insolvent debtors in the conduct of their affairs, or which had contributed to the losses sustained by their creditors, were not punishable or even cognizable by courts having bankruptcy jurisdiction unless or until a debtor who had a receiving order against him, or became a bankrupt, applied for an order sanctioning a composition or scheme of arrangement with his creditors, or for an order discharging him from his debts. The most prominent of these delinquencies which were brought to the notice of the committee were--failure by a debtor to keep any books or any proper or adequate books of account in his business; trading with knowledge of insolvency; gambling and speculation leading to, or contributing to, the debtor's insolvency or bankruptcy; failure properly to account for any substantial deficiency of a.s.sets. The committee received a large body of evidence in favour of making delinquencies such as have been described punishable by imprisonment.

Evidence was also given as to the laws in force in Germany, France and Scotland, from which it appeared that such delinquencies, especially that of keeping no books of account, can be severely dealt with as criminal offences.

After carefully weighing the evidence on both sides the committee recommended that the failure or omission by a debtor who becomes bankrupt to have kept any books of account, or proper books of account, within two years next preceding his bankruptcy, in a trade or business carried on by him, if without excuse, should be made by law an offence punishable on summary conviction by imprisonment, subject to four important limitations, namely, that the law should define what books of account a person carrying on a trade or business must keep, following in this respect the law in force in France and Germany; that failure or omission by a debtor to have kept the required books should only be punishable in the event of a debtor becoming bankrupt and of the liquidated debts proved in the bankruptcy exceeding 200 in amount; that no prosecution of a debtor for failure or omission to keep books of account should take place before the lapse of two years from the pa.s.sing of the law; that a debtor should not be punished if he could show that his failure or omission to keep proper books was honest and excusable and did not contribute to his insolvency, and that no prosecution should be inst.i.tuted for the offence except by order of the bankruptcy court. The committee made recommendations of much the same character with regard to punishing some of the other delinquencies mentioned above. There were also recommendations by the committee as to trading by undischarged bankrupts, as to the realization of estate on bankruptcy, as to the operation of the law of relation back of a bankruptcy trustee's t.i.tle, as to the law relating to the after-acquired property of an undischarged bankrupt, and dealings with such property, and with respect to married women and their liabilities under bankruptcy law. The committee also reported on the law and practice relating to voluntary deeds of arrangement between a debtor and his creditors and on the compulsory regulation of a.s.signments of book debts, and of agreements for the hire and purchase of chattels.

[Sidenote: Results of legislation.]

In addition to this report the annual reports of the Board of Trade, which are accompanied by elaborate tables of statistics, and by copious ill.u.s.trations both of the working of the system and of the characteristic features and causes of current insolvency, are published as parliamentary papers, and may be usefully consulted by those interested in the subject.

It appears from these reports that the total number of insolvencies dealt with under the bankruptcy acts during the ten years ending 31st December 1905, was 43,141, involving estimated liabilities amounting to 61,685,678, and estimated a.s.sets amounting to 26,001,417. It may also be pointed out that according to the official figures, the cost of bankruptcy administration under the present system has very considerably decreased as compared with that under the act of 1869. Estates are also closed at much shorter intervals, and, what is more important from a public point of view, it appears [v.03 p.0325] that while the estimated liabilities of bankrupt estates during the ten years ending 1883 amounted on an average to 22,380,000 per annum, the estimated liabilities during the ten years ending 1905 only averaged 6,168,567 per annum. But during the latter period there was an annual average of 3426 private arrangements involving a further estimated annual liability of 4,166,354 entered into outside of the Bankruptcy Acts by insolvent debtors. There are no means of ascertaining the corresponding amount of liabilities on private arrangements outside of the Bankruptcy Acts prior to 1883, and therefore a complete comparison is impossible; but it is evident that on any method of computation there has been a very great diminution in the trading insolvency of England and Wales, while it is also clear as a matter of general knowledge in commercial circles, that a great decrease in the proportion of fraudulent trade and reckless speculation has been a marked feature of private trading during the period in question.

The cost of bankruptcy administration is provided for: (1) by fees charged to bankrupt estates, (2) by interest on balances at the credit of such estates with the bankruptcy estates account, and (3) by interest on unclaimed funds at the credit of estates under former Bankruptcy Acts.

Out of this are paid the salaries of all the officers of the department, including the official receivers; the remuneration due in respect of bankruptcy services to the county court registrars; pensions, &c., payable to retired officers under the present and previous Bankruptcy Acts; cost of bankruptcy prosecutions; and rents, stationery, travelling and other incidental expenses. The system is self-supporting and involves no charge upon the tax-payers of the country. It has been objected that inasmuch as the act professes to be based on the principle of enforcing commercial morality in the interests of the general community, the cost of administering it should not be charged entirely to the bankruptcy estates concerned. But when it is considered that a large part of the revenue of the department is derived from funds to which estates administered under the present act have contributed nothing, this objection does not appear to be well founded.

[Sidenote: Summary of procedure.]

For the convenience of readers who may require more detailed information, the accompanying summary of some of the more important provisions of the law relating to bankruptcy procedure is submitted. It must be borne in mind, however, that the subject is in some of its branches extremely intricate, and that both the law and the procedure are being constantly affected by a considerable body of judicial interpretation, while the acts also contain detailed provisions with regard to many questions incident to the administration of bankruptcy. A reference to the latest textbooks or competent professional advice will always be advisable for those who have the misfortune to be practically interested either as debtors or as creditors in bankruptcy proceedings.

[Sidenote: Deeds of arrangement.]

The Deeds of Arrangement Act 1887, although not falling strictly within the scope of the bankruptcy law, may also, in consequence of its important bearing upon the question of insolvency in England and Wales, be here noticed. It has been pointed out that, under the Bankruptcy Acts of 1849 and 1861, non-official arrangements by deed between a debtor and the general body of his creditors were not only officially recognized, but were in certain circ.u.mstances made binding on all the creditors, including those who refused to a.s.sent to them. Under the act of 1869, although such deeds were no longer recognized or made binding on non-a.s.senting creditors, the proceedings under the "liquidation by arrangement" and "composition"

clauses were practically private arrangements by resolution instead of deed, and were proved by experience to be open to the same abuses. It has also been shown that under the act of 1883 no arrangements either by deed or by resolution have any force against dissenting creditors, unless confirmed after full investigation and approval of the bankruptcy courts.

Private arrangements, therefore, cease to form any part of the bankruptcy system. But they are, nevertheless, binding as voluntary contracts between the debtor and such creditors as a.s.sent to them. Being, however, in the nature of a.s.signments of the debtor's property, they are either deemed fraudulent if the benefit of the a.s.signment is limited to a portion of the creditors, or, if it is extended to all they become acts of bankruptcy, and, like any other voluntary a.s.signment, are liable to be invalidated if made within three months prior to the pet.i.tion on which a receiving order is made against the debtor. Treated as voluntary a.s.signments, which are not binding on those who do not a.s.sent to them, such arrangements, where honestly entered into and carried out by capable administration, in many cases form a useful and expeditious method of liquidating a debtor's affairs, and where the debtor's insolvency has been brought about without any gross misconduct they will probably always be largely resorted to. The danger attending them is that even in cases where the debtor has been guilty of misconduct, a private arrangement may be used to screen his conduct from investigation, while in many cases it may be made the medium for the concealment of fraudulent preferences. The absence of any independent audit of the trustees' accounts may also encourage or conceal irregularities in administration. Previous to 1887, however, much inconvenience arose from the fact that the execution of these private arrangements was frequently kept secret, and fresh credit was obtained by the debtor without any opportunity being afforded for the new creditors becoming acquainted with the fact that they were dealing with an insolvent person, and that in many cases they were simply supplying the means for meeting past obligations in respect of which the debtor had already committed default. The Deeds of Arrangement Act 1887 was therefore pa.s.sed to compel the disclosure of such arrangements, by declaring them void unless registered within seven days after the first execution by the debtor or by any creditor. Registration is effected by lodging with the registrar of bills of sale at the central office of the Supreme Court a true copy of the deed and of every inventory and schedule attached thereto, together with an affidavit by the debtor, stating the total estimated amount of property and liabilities, the total amount of composition, if any, and the names and addresses of the creditors. Where the debtor's residence or place of business is outside the London bankruptcy district, the registrar is required to forward a copy of the deed to the registrar of the county court of the district where the debtor's residence or place of business is situated. Both the central and the local registers are open to public inspection on payment of a small fee and general publicity is secured by the action of various trade agencies, which make a practice of extracting and publishing the information for the benefit of those interested. By section 25 of the Bankruptcy Act 1890, every trustee under a deed of arrangement is required to transmit to the Board of Trade within thirty days of the 1st of January in each year an account of his receipts and payments and such accounts are open to the inspection of any creditor on payment of a small fee. They are not, however, subject to any kind of audit or control by the department. The registrar is also required to make periodical returns of the deeds thus registered to the Board of Trade, in order that a report of proceedings under the Deeds of Arrangement Act may be included in the annual report which the department is required to make on proceedings under the Bankruptcy Acts. Full statistics of such proceedings are accordingly included in these reports, from which it appears that during the ten years ended 31st December 1905 the total number of registered deeds of arrangement was 34,273, with estimated liabilities amounting to 41,663,541, and estimated a.s.sets to 23,020,483.

_Summary of Bankruptcy Procedure._--Subject to certain special provisions in the case of what are termed "small bankruptcies" (see below), the following summary sets forth some of the more important provisions of the various acts and rules relating to bankruptcy administration grouped under convenient heads to facilitate reference. In some cases the effect of legal decisions has been embodied in the summary.

_Preliminary Proceedings._

_Pet.i.tion and Receiving Order._--Any court exercising bankruptcy jurisdiction in the district in which he resides or carries on business [v.03 p.0326] in England or Wales may make a receiving order against a debtor, whether a trader or not, either on his own pet.i.tion or on that of a creditor or creditors whose claims aggregate not less than 50. In the case of a creditor's pet.i.tion proof must be given of the debt, and of the commission of an act of bankruptcy within three months preceding the date of the pet.i.tion. An act of bankruptcy is committed if the debtor fails to satisfy the creditor's claim upon a bankruptcy notice; if he makes an a.s.signment for the benefit of his creditors generally; if he absconds or keeps house; if he gives notice of suspension of payments; if his goods are sold or seized under execution; if he files in court a declaration of inability to pay his debts; or if he grants a fraudulent preference or conveyance. These acts are here enumerated in the order in which they most frequently occur in practice.

_Object and Effect of Receiving Order_.--The object of the order is to protect the debtor's property until the first meeting of creditors, and to bring the debtor and his affairs within the jurisdiction of the court. Its effect is to stay all separate action against the debtor, and to const.i.tute the official receiver attached to the court receiver of the debtor's property, although the legal t.i.tle still remains in the debtor. Where there is an estate or business to be managed the official receiver may appoint a special manager, who receives such remuneration as the creditors, or failing them the Board of Trade, may determine. As a consequence of the order the following obligations are imposed upon the debtor:--He must make out and submit to the official receiver within a prescribed period a statement of his affairs, containing the names and addresses of his creditors, the amount of their claims and the securities held by them, and the nature and value of his a.s.sets; and accounting for his deficiency. Any material omission or false statement of his losses or expenses is a misdemeanour under the Debtors Act, unless he can prove that he had no intention to defraud. The statement is open to the inspection of creditors.

He must also in every case submit to a public examination in court, in which the official receiver, the trustee and any creditor who has proved his debt may take part. His evidence may be used against him. He may further be specially examined by the court at any time with reference to his dealings or property. He must attend the first meeting of creditors, wait upon the official receiver, trustee and special manager, and give all necessary information, and generally do all acts which may reasonably be required of him with the view of securing a full investigation of his affairs. He may be arrested if there is reasonable ground for believing that he is about to abscond, destroy papers or remove goods, or if he fails without good cause to attend any examination ordered by the court. The court may also for a period of three months order his letters to be re-addressed by the post-office to the official receiver or trustee. With regard to persons other than the debtor, any person capable of giving information respecting the debtor, his dealings or property, may be examined by the court, and a summary order may be made against such person for delivery of any property belonging to the debtor.

_First Meeting of Creditors._

This meeting is summoned by the official receiver, notice being given in the _London Gazette_ and in a local paper, and sent by post to each creditor. A summary of the statement of affairs should accompany the notice, with any observations by the official receiver which he may think fit to make. The object of the meeting is to decide whether any proposal for payment of a composition or for a scheme of arrangement submitted by the debtor is to be entertained, or whether an application should be made to the court to adjudicate the debtor bankrupt. In the latter case the meeting may by an ordinary resolution appoint a trustee with or without a committee of inspection. It may also give any directions as to the administration of the estate. The meeting should be held at the place most convenient for the majority of the creditors. It is presided over by the official receiver or his deputy, who, subject to appeal to the court, admits or rejects proofs for the purpose of voting. For the transaction of business three creditors qualified to vote, or all the creditors if fewer than three, must be present or represented. Only persons who have proved their debts are ent.i.tled to vote, and detailed regulations respecting proofs and the valuation of securities are laid down in the first and second schedules to the act of 1883. One of the chief alterations in the law on this point is the condition imposed on creditors on bills of exchange to deduct from their claims the value of the liability of prior obligants before voting, thus cancelling the power of controlling the proceedings previously possessed by persons who had no real interest in the estate. Votes may be given in person or by proxy, and stringent regulations are laid down with the view of preventing the abuse of proxies. General proxies ent.i.tling the holder to exercise all the powers which the creditor could exercise if present may be given to the official receiver or to any person in the regular employment of the creditor. Special proxies may be given to any person to vote for specified resolutions, or for the appointment of specified persons as trustee and committee. Only official forms can be used, and the blanks must be filled up in the handwriting of the creditor or some person in his regular employment, including the authorized agent of a creditor resident abroad. A proxy must be lodged with the official receiver not later than four o'clock on the day before the meeting or adjourned meeting at which it is to be used. Resolutions are ordinary, special or extraordinary. An ordinary resolution is carried by a majority in value of the creditors voting; a special resolution by a majority in number and three-fourths in value of such creditors. The only instance of a resolution other than these is that required for the approval of a composition or scheme which requires a majority in number and three-fourths in value of all the creditors who have proved. The majority of questions arising at a meeting are decided by an ordinary resolution.

_Adjudication._

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, doc.u.ments, &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 fict.i.tious losses; or if within four months next before presentation of a bankruptcy pet.i.tion, 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 a.s.sent 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 a.s.sets 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 a.s.sets 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 [v.03 p.0327] 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 pa.s.s 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 circ.u.mstances 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 t.i.tle 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 pet.i.tion, and thus invalidates all payments and a.s.signments to creditors made during that period with knowledge on the part of the creditor or a.s.signee 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 pet.i.tion 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 pa.s.sed 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 acc.u.mulations of business or other profits after the commencement of the bankruptcy, and before he obtains his discharge, the trustee's t.i.tle 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.

_Claims of Creditors and Dividends._

In the distribution of the debtor's property certain claims are ent.i.tled to priority over others. Thus the landlord, although not ent.i.tled 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 ent.i.tled 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 pa.s.su_. 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 circ.u.mstances 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 partic.i.p.ate 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 [v.03 p.0328] yet determined. Creditors who fail to prove before the declaration of a dividend are ent.i.tled 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 partic.i.p.ation in the estate. In the case of a bankrupt firm the joint creditors are not ent.i.tled 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 a.s.sets 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 pa.s.ses 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 a.s.signed, 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, inst.i.tute 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.

Where any part of the property is held subject to onerous obligations, such as the payment of rent, &c., the trustee may disclaim the same, subject in certain cases to the leave of the court, and the disclaimer operates to determine all interest in or liability in respect of the property on the part of the estate. The trustee is required to keep a record book (which is commenced by the official receiver), containing minutes of the proceedings in the bankruptcy, and a cash book in the prescribed form, in which all receipts and payments by him must be entered. All monies received must forthwith be paid into an account at the Bank of England, ent.i.tled the "Bankruptcy Estates Account," which is under the control of the Board of Trade, unless where in special circ.u.mstances the sanction of that department is obtained to the opening of a local banking account, but in no circ.u.mstances must estate monies be paid to the trustee's private account.

When monies are required for the purpose of the estate, special cheques or money orders are issued by the Board of Trade on the application of the trustee.

_Control over Trustee._--In his administration of the estate the trustee is subject to control by the committee of inspection, the creditors, the court and the Board of Trade. The committee is appointed by the creditors, and must consist of not more than five nor less than three creditors or authorized representatives of creditors. It acts by a majority present at a meeting, and should be convened once a month unless it otherwise directs.

If no committee is appointed, the Board of Trade may give any direction or permission which might have been given by a committee. Directions given by the committee, if not inconsistent with the provisions of the act, are binding on the trustee, unless contrary to or overruled by those of the creditors or of the court. The official receiver or trustee may summon a meeting of the creditors at any time to ascertain their wishes, and must do so when so required by one-sixth in value of the creditors or when directed by the court. The Board of Trade may also direct the official receiver to summon a meeting for the purpose of reviewing any act done by the trustee or any resolution of the committee of inspection. Further, the trustee may apply to the court for directions in any particular matter, and the court may also, on the application of any person aggrieved reverse or modify any act of the trustee, or make such order as it deems just. The directions of the court override those of the creditors. The Board of Trade is required to take general cognizance of the conduct of trustees, to inquire into any complaints by creditors, and in the event of any trustee not faithfully performing his duties, to take such action, including the power of removal, as may be expedient. It may also direct a local investigation of the trustee's books and accounts, and may require him to answer any inquiries, or may apply to the court to examine him on oath. If any loss has arisen to the estate from any misfeasance, neglect or omission of the trustee, it may require him to make it good. The orders of the Board of Trade under the powers conferred by the act may be enforced by the court by committal of the trustee or otherwise.

_Audit of Accounts._--The trustee's accounts must be audited by the committee of inspection not less than once in every three months; and once in every six months, as well as at the close of the administration, the record and cash books must also be submitted with the vouchers, and the committee's certificate of audit to the Board of Trade for final audit. If it appears that the trustee has retained more than 50 in hand for more than ten days without a satisfactory explanation, he may be removed from office, surcharged with interest at the rate of 20% per annum and lose all claim to remuneration.

_Remuneration._--The trustee's remuneration is fixed by the creditors or by the committee if so authorized by them. It must be in the nature of a percentage on the amount of the realization and on the dividends. If one-fourth of the creditors in number or value dissent from the resolution, or if the bankrupt satisfies the Board of Trade that the remuneration is excessive, the Board may review the same and fix the remuneration. A trustee may not receive any remuneration for services rendered in any other capacity, _e.g._ as solicitor, auctioneer, &c., beyond that voted to him as trustee; nor may he share his remuneration with the bankrupt, the solicitor or other person employed about the bankruptcy; or receive from any person any gift, or other pecuniary or personal benefit in connexion therewith.

_Costs._--A trustee receiving remuneration is not allowed the costs of any other person in respect of duties which ought to be performed by himself.

All bills of solicitors and other agents employed must be taxed before payment, as being in accordance with the prescribed scales of costs; and the taxing master must satisfy himself that the employment has been properly authorized before the work was done. All bills of costs must be delivered to the trustee within seven days of the request for the same, otherwise the estate may be distributed without regard to such costs.

_Release._--When the property, so far as it is capable of realization, has been realized and distributed, the trustee must apply to the Board of Trade for his release, forwarding to each creditor a notice of his having done so, together with a copy of his final accounts, and the Board of Trade, after preparing and considering a report on the same, and the objections of any person interested, may, subject to appeal to the High Court, grant or withhold the release. If a release is withheld, the court may, on the application of any person interested, make such order against the trustee as it thinks just. The release when granted operates as a removal from office, and thereupon the official receiver again becomes trustee, and is thus in a position, even after the nominal close of the bankruptcy, to deal with any circ.u.mstances which may arise, or which have not been foreseen and provided for.

_Small Bankruptcies._

When the official receiver reports, or the court is otherwise satisfied that the debtor's property is not likely to realize more than 300, the court may make an order for the summary administration of the estate, in which case, if the debtor is adjudged bankrupt, the official receiver in the ordinary course becomes and remains trustee, and certain other modifications are effected with the view of simplifying [v.03 p.0329] and accelerating the procedure. The chief of these modifications are as follows, viz. the Board of Trade acts as committee of inspection; there is no advertis.e.m.e.nt of the proceedings in a local paper; in legal proceedings all questions of law and fact are determined by the court without a jury; adjudication may be made on a report by the official receiver before the first meeting of creditors where no composition or scheme is proposed; meetings of creditors may be held in the town where the court sits or the official receiver's office is situated; notice to creditors of meetings other than the first meeting, or of application by a debtor for his discharge, are dispensed with in the case of creditors for amounts not exceeding 2. Costs, other than a solicitor's charges, may be paid without taxation; and the time for declaring the first dividend is extended to six months, but the whole estate must be realized and distributed within this period if practicable. No modification, however, is permitted in the procedure relating to the public examination and discharge of the bankrupt.

Notwithstanding that an order has been made for summary administration, the creditors may at any time by a resolution pa.s.sed by a majority in number and three-fourths in value of those voting at the meeting, appoint a trustee in place of the official receiver, in which case the summary order ceases to be operative.