The document summarizes the historical development of bankruptcy law from medieval England to modern times. It discusses key developments including: 1) The first English bankruptcy statute passed in 1542 under King Henry VIII to deal with fraudulent traders and secure property for creditors. Debtors remained liable for debts. 2) Early bankruptcy law only applied to traders and provided no relief for debtors. Reforms were piecemeal and punishment of debtors continued. 3) In the 18th-19th centuries, a distinction emerged between dishonest and honest but unfortunate debtors. The 1869 Act provided relief for both traders and non-traders, freed bankrupts from debts, and established administration of bankruptcy. 4)

1. BANKRUPTCY & COMMERCIAL SECURITIES 18th
June 04
Lecture 2
HISTORICAL REVOLUTION OF BANKRUPTCY LAW
Bankruptcy Act Cap 53 Laws of Kenya
Ian Macneil – Bankruptcy in East Africa
Fridman Bankruptcy Law and Practice
Thomspson J.H. The principles of Bankruptcy Law
Holdsworth on Historical Development
Basically the law of bankruptcy has a long history and only a summary of the main
developments may be highlighted
1. In the English medieval and mercantilist periods the law commences
with a statute enacted during the reign of King Henry VIII which largely
dealt with fraudulent traders. This legislation was passed in 1542 and it
aimed mainly at securing the property of the debtor for his creditors. It
did nothing to relieve the debtor of his obligations if his debts exceeded
the value of his property. If this occurred the debtor remained liable for
the debt and could even be imprisoned for failure to repay. It should be
noted that the law was introduced specifically to protect creditors.
However, each creditor proceeded against the debtor individually and
the debtor’s property was acquired on the principle of first come first
served.
2. Early bankruptcy law only applied to traders. It should be recalled that
this was the mercantilist free trade era of the 16th
and 17th
centuries. The
traders complained against the unfairness of the law but their outcry for
protection led only to peace meal reforms and amendments but the
punishment of debtors was not alleviated or mitigated in any way. None
traders who could not pay their debts were subject to another set of
statutes relating to insolvent debtors.
3. IN the 18th
and 19th
centuries there was great expansion in the availability
of credit. This was the era of the formation of Joint Stock Companies
which preceded the modern limited liability companies. Debtors were
therefore on the increase. This is as a result of the historical
development of capitalism as a mode of production where competition is
emphasised culminating in monopoly capitalism hence those who cannot
compete within the system fallout and many become debtors. However,
it was discovered that people do not become debtors of their own free
will. A distinction is sought to be made between dishonest debtors who
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2. should be punished and the honest but unfortunate ones who should
somewhat be protected. In 1834 the bankruptcy law was extended to
none traders. Some land owners had become debtors and had to be
catered for by the law. in 1869 an Act to amend and consolidate the
existing law was passed. This Act contained many of the substantive
bankruptcy law principles which are now in operation today. The broad
principle of the Act was that the Bankrupt should be a freed person. He
should be freed not only from his depths but also from every possible
claim or liability except for personal torts committed by him. On the
other hand, all creditors were grouped together for purposes of
proceeding against the debtor. The Act also provided for the
administration of bankruptcy law and matters in the London Bankruptcy
District by Judges of the High Court specially appointed by the Lord
Chancellor and in the Counties by County Court Judges. There was no
separation between the judicial and administrative functions both of
which were exercised by the court. The administration of bankruptcy
matters under the 1869 Act did not work well due to the lack of official
control over the Trustees in Bankruptcy which was a new office created
by the Act in the place of the former system of Official Assignees.
In 1883 another Act was passed in England which repealed the 1869 Act and
amended and consolidated the law. this is the Act that laid the basis of modern
Bankruptcy administration. It separated the judicial and administrative functions.
The judicial functions remained vested in the High Court and County Courts while
the administrative functions were transferred to a Board of Trade. The 1883 Act
also introduced the present day law on the following
1. The public investigation by the Court into the debtor’s conduct;
2. Punishment for Bankruptcy offences committed by the bankrupt;
3. strict investigation and prove of debt;
4. General supervision of proceedings including the control of funds and
independent audits of trustees accounts.
No important reforms were introduced by the Bankruptcy Act of 1890 and the
Bankruptcy and Deeds of Arrangement Act of 1913. The main reforms made by the
1890 Act was in respect of the conditions for the discharge of a bankrupt. The 1913
Act made offences by Bankrupts punishable summarily and tightened the law as to
their criminal liability.
The present law of bankruptcy in England is contained in the following:-
1. The Bankruptcy Act of 1940 which was a consolidating Act of Bankruptcy
Legislation;
2. The Bankruptcy Rules of 1915;
3. The Bankruptcy Amendment Act of 1926;
4. The Judicial Decisions on the construction of this statutes.
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3. However, it is important to note that there have been subsequent developments in
England culminating in the enactment of the 1986 Insolvency Act.
In Kenya, Bankruptcy is governed by the Bankruptcy Act 1930, the present Chapter
53 of the Laws of Kenya.
1. This Act is largely identical to the English Bankruptcy Act of 1940 and the
Bankruptcy Amendment Act of 1926.
2. The Bankruptcy Rules are again similar to the English Bankruptcy Rules
of 1952 which do not differ significantly from the English bankruptcy
rules of 1915.
3. Legislation dealing with deeds of arrangement is again patterned on the
English Act of 1914 and this is the Deeds of Arrangement Act of 1930
which is the current Chapter 54 of the Laws of Kenya;
BANKRUPTCY & INSOLVENCY
Bankruptcy is the legal status of an individual against whom an adjudication order
has been made by the court primarily because of his inability to meet his financial
liabilities and Adjudication Order in Bankruptcy is a judicial declaration that the
debtor is insolvent and it has the effect of imposing certain disabilities upon him
and of divesting him of his property for the benefit of his creditors.
Bankruptcy must be distinguished from insolvency which may be defined as the
inability of a debtor to pay his debts as and when they fall due. Whether or not a
person is insolvent is purely a question of fact thus a person can be insolvent
without being bankrupt but he cannot be bankrupt without being insolvent.
OBJECTS OF BANKRUPTCY LAWS
Three main objects of Bankruptcy Laws within the common law jurisdiction have
been identified as follows:
1. To secure an equitable distribution of the property of the debtor among
his creditors according to their respective rights against him;
2. To relieve the debtor of his liability to his creditors and to enable him to
make a fresh start in life free from the burden of his debts and
obligations;
3. To protect the interests of the creditors and the public by providing for
the investigation of the conduct of the debtor in his affairs and for the
imposition of punishment where there has been fraud or other
misconduct on his part.
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4. Professor Fridman in his book Bankruptcy Law and Practice has given some
reasons for the growth of Bankruptcy. He says that “the alleviation of the plight of
the debtor by a more merciful though rigorous provision of Bankruptcy Law has
several causes
(a) The rise in importance of trading on credit and the need to
encourage such trading for commercial purposes thus increasing
chances for financial embarrassment for traders which would
make trading more difficult if the harshness of the older law of
debt still remained in force;
(b) The change in outlook of society towards those who fail to pay
their debts from regarding them as criminals to looking at them
only as unfortunate;
(c) The need to protect creditors by giving them some relief though
not as great as they are justly entitled to expect rather than
punishing the debtor;
(d) The benefit to the community as a whole in that
(i) The creditors should get something rather than lose all if the
debtor could escape with the assets he has or is imprisoned so as
to be unable to obtain any assets in the future and
(ii) In that an opportunity is afforded to the debtor to make a fresh
start.
Professor Fridman thus asserts that the modern law of bankruptcy is a compromise
which is intended to benefit all the parties.
UNDERLINED PRINCIPLES (BASIC PRINCIPLES
1. The Debtor must surrender all his properties to the creditors;
2. After payment of a percentage of his liabilities, the debtor may obtain a
full discharge from his past debt;
3. The creditors may grant a debtor a discharge even where the debtor pays
them less than what is prescribed by the law;
4. The court is the arbitrator in all matters relating to the Bankruptcy;
5. Once discharged, a debtor is freed from his financial obligations and
reverts to his former status in society.
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