Bankruptcy
The status of a debtor who has been declared by judicial process to be
unable to pay his debts. Although sometimes used indiscriminately to
mean insolvency, the terms have distinct legal significance. Insolvency,
as used in most legal systems, indicates the inability to meet debts.
Bankruptcy, on the other hand, results from a legal adjudication that the
debtor has filed a petition or that creditors have filed a petition against
him.
Bankruptcy laws were enacted to provide and govern an orderly and
equitable liquidation of the estates of insolvent debtors. This purpose
has remained an important aim of bankruptcy legislation since the
Middle Ages. Because in the past bankruptcy was coupled with the loss
of civil rights and imposition of penalties upon fraudulent debtors,
the designation bankrupt came to be associated with dishonesty, casting
a stigma on persons who were declared bankrupts. Eventually, however,
bankruptcy legislation was extended to provide procedures for the
adjustment of debts so as to avoid liquidation and for the rehabilitation
of insolvent debtors. Modern bankruptcy laws, therefore, include
detailed provisions for preventive compositions, arrangements, or
corporate reorganizations of various types. In fact, the salvage of an
enterprise in financial difficulties has become the principal focus of
bankruptcy legislation with particular concern for the maintenance of
employment opportunities and the protection of members of the labour
force.
In addition, the bankruptcy laws of England, the United States, and the
British Commonwealth nations traditionally came to include provisions
for the unpaid portions of debts incurred prior to bankruptcy in order to
give honest but unfortunate debtors a new start in life. The bankruptcy
laws of the European and Latin American countries, by contrast, did not
have such provisions. In the late 20th century, however, legislation in
some of these countries (e.g., Argentina and France) provided for
the discharge of the unpaid portion of pre-bankruptcy creditors under
certain conditions.
Since bankruptcy laws aim at the liquidation or rehabilitation of
insolvent estates, bankruptcy proceedings involve all nonexempt assets
of the debtor, and all creditors entitled to share in the proceeds of the
liquidation or in the adjustment of their claims are called to participate.
Accordingly, bankruptcy proceedings are viewed as general or universal
collection procedures as distinguished from individual collection
remedies available to particular creditors for the enforcement of their
claims.
Avoidance of bankruptcy
The dire consequences of bankruptcy for the debtor, such as the loss
and liquidation of his assets, imprisonment, and loss of civil rights,
resulted in the need for procedures avoiding such sanctions. A remedy
was found in the right of a deserving debtor to reach an agreement for
an extension or reduction of his debts with a majority of his creditors
that was binding on dissenters. The cradle of this institution was again
the statutes of the medieval cities. Provisions to that effect were also
contained in the Siete Partidas. In England, similar procedures were
developed by the Privy Council through bills of conformity, but this
practice ended with the abolition of the council’s civil jurisdiction in
1641. In France the Ordonnance du Commerce of 1673 recognized
majority compositions as a legitimate means of handling the estates of
insolvents without liquidation. The Commercial Code of 1807, however,
and following it the laws of other countries, restricted them to a method
of terminating rather than preventing bankruptcy proceedings.
Preventive compositions were reintroduced as legitimate means of
dealing with embarrassed or insolvent estates only during the second
part of the 19th century; they are now recognized in most countries as
important devices for economic rehabilitation.
At one time all bankrupts were considered defrauders and criminals.
They were subjected to severe social and professional sanctions,
including even a degrading form of dress. In recent times, however, great
efforts have been made to remove the disgrace attached to bankruptcy.
Even the terms bankrupt and bankruptcy (or their equivalents in other
languages) are used less and less frequently in the statutory language.
Modern French legislation, for example, totally suppresses the
traditional term faillite as the name of liquidation proceedings and
restricts it to special procedures entailing the imposition of
disqualifications on insolvents guilty of commercial misconduct.
Liquidation of the estates of insolvent debtors
Most nations with private-enterprise economies have legislation
providing for liquidation of hopelessly insolvent estates. Liquidation
proceedings are often referred to as “straight” bankruptcy, in
contradistinction to other insolvency proceedings aiming at
arrangements or reorganizations. Recent insolvency laws, such as those
enacted in Argentina and France, provide for a unified procedure in
which liquidation is decreed only after the possibility of reorganization
has been found not to exist or an attempted reorganization has failed.
