"Bankruptcy, in my opinion, ever was and yet is considered as a crime, whatever tradesmen may now think of it. It was anciently punished by corporal punishment."

So wrote judge Abney in the 1744 English case Tribe v Webber.

Bankruptcy law concerns the rehabilitation of an honest but unfortunate debtor by the erasure of his debts exchange for a brief period of time during which uses his financial independence and must make nominal payments to his creditors.

Bankruptcy law per se is a fairly modern concept, the word itself of French origin ("banque route").

A history of bankruptcy law unveils in three distinct phases.

The first phase was a phase of basic debt collection.

In 450 BC, the Roman Law of the Twelve Tables provided a fairly persuasive method for dealing with individuals who did not appear to be able to pay their debts when they fell due.

Table III dealt with the process to follow. First, the debtor is given 30 days to pay, or find someone else to pay for him. If payment is not made, the creditor can take a better home and:

"Fasten him in stocks or fetters. He shall fasten him with not less than fifteen pounds of weight or, if he choose, with more. If the prisoner choose, he may furnish his own food. If he does not, the creditor must give him a pound of meal daily; if he choose he may give him more."

bankruptcy pillarThree market days later, the creditors were entitled to divide the debtor's body amongst them.

Table III was careful to clarify that "if they cut more or less than each one's share it shall be no crime".

Roman law eventually evolved, but not by much.  The Roman debtor no longer had to worry about being cut up into proportionate pieces but instead, should he become insolvent, was merely imprisoned for life or, at his creditors option, sold, along with his wife and children, to perpetual foreign slavery.

Roman expansion into the territory presently held by modern-day Europe brought this law with them.

The concept of imprisonment for debts was emulated in the ancient law of some parts of India, with a little twist. The creditor:

"... may even violate with impunity the chastity of the debtor's wife. But then, by so doing, the debt is understood to be discharged."

In the era of Charlemagne, if a debtor transferred everything he owned to his creditors, he can escape imprisonment and in any event, while imprisonment continued as an option, torture was outlawed as a response to debt.

The second phase saw insolvency law becomes a more pronounced area of the law, which gradually dealt with absconding debtors and provided financial salvation, but for traders only (not the general public).

England run in its first bankruptcy legislation in 1542. During the reign of Henry VII, a statute was introduced with the following preamble:

"Where divers and sundry persons craftily obtaining into their hands great substance of other men's goods, do suddenly flee to parts unknown, or keep their houses, not minding to pay or restore to any their creditors, their debts and duties, but at their own wills and pleasures consume the substance obtained by credit of other men, for their own pleasure and delicate living, against all reason, equity and good conscience."

The statute listed several methods of debt frustration it sought to stop. They included a person who "departed from the realm" in order to avoid debts; or who kept to his house privately so as to avoid creditors; or who intentionally got himself arrested or failed to seek bail all in order to avoid his creditors.

A complex system was provided in the 1542 legislation based on complaints made to the Lord Chancellor and allowing for the seizure of the debtor's property and the payment "for true satisfaction and payment of the creditors".

Later, the law was amended so that bankruptcy protection was only available to "traders" and not other members of the public. "Traders" were defined as people who made their living by buying, selling, bargaining, exchanging or bartering a merchandise in gross or by retail.

The reasoning behind this was, according to Blackstone:

"... since that is set of men are, generally speaking, the only persons liable to accidental losses, and to an inability of paying their debts, without any fault of their own. If persons in other situations of life run in debt without the power of payment, they must take the consequences of their own indiscretion, even though they meet with sudden accidents that may reduce their fortunes: the law holds it to be an unjustifiable practice for any person but a trader to encumber himself with debts of any considerable value."

Or this, from Justice Roll in Rooke v Smith (1651):

"A man may be a bankrupt, and yet be honest, for he may become so by accident, and not of purpose to deceive his creditors."

A bankrupt was therefore a "trader" who "secrets himself, or does certain other acts, tending to defraud his creditors."

That left the general public out in the cold ... sometimes literally.

The third, present-day phase provides financial salvation for bankrupt individuals regardless as to whether the insolvency is due to accident, negligence or poor judgment provided only that it is a pre-planned action, part of a larger conspiracy to defraud creditors, also known as due to bankruptcy fraud.

REFERENCES

  • Ashby v Steere, 2 Federal Cases 19, #576 (1846)
  • Blackstone Commentaries, Book II, "Of The Rights Of Things"
  • Fordham University, Ancient History Sourcebook, New York
  • Mod. Un. Hist. VII 128
  • Rooke v Smith Style's Rep. 274 (1651)
  • Tribe v Webber Willes 466 (1774)
  • 34 Henry VIII, Chapter 4
  • 13 Elizabeth, Chapter 7