BILL PEESENTED. FIRST READING. (Hansard, 1 June 1876)

THE LORD CHANCELLOR

My Lords, I have to ask your Lordships to allow me to call attention to a subject 1497 which I am afraid will not appear to be one of much interest, but which really is of great importance to various classes in this country—particularly to the mercantile and trading classes. I do not propose to go into the history of the Law of Bankruptcy in this country, or of the various changes which it has undergone; but I may remind your Lordships that the course of legislation on bankruptcy in this country has shown very remarkable fluctuations between extremes. Up to 1832 to a great extent the control of proceedings in bankruptcy was left to the creditors or those who directly represented the creditors in the bankruptcy. That system was thought to result in considerable evil and disorganization:—a change was called for, and in 1832 commenced a period of what may be described as "officialism"—that is, bankruptcy proceedings were, to a greater extent than had been the case previously, intrusted to the Court of Bankruptcy, and to officials paid by salary was confided the task of winding-up estates in bankruptcy. That continued from 1832 until 1861. In the latter year the tide had set in a different direction, and an advance was made towards giving the creditors once more the control of bankruptcy proceedings. That movement was consummated by the Act of 1869—the present Law of Bankruptcy—which to a greater extent than perhaps had ever before been contemplated, handed over to the creditors of the bankrupt the control and administration not only of the bankrupt's estate, but of all arrangements in the nature of bankruptcy. But, my Lords, this produced evils which are now greatly complained of. Great complaints were made before 1832; but from 1832 to 1869 there were other complaints—namely, complaints that the creditors of a bankrupt were not allowed to manage the bankrupt's affairs. I am sorry to say that since 1869 the discontent has not ceased—on the contrary, there are now great complaints of the working of the last Act relating to bankruptcy. Those complaints were laid before me in the course of last year, and I determined to appoint a small Committee of those who were best qualified to judge of the matter, in order that such Committee might consider and report whether any change by legislation, or by means of General Orders, 1498 was necessary to abate the evils which have arisen in the working of the Bankruptcy Act of 1869. I should like to mention the names of the members of that Committee. First there was Mr. Kettle, a County Court Judge, who has great practical knowledge of the working of bankruptcy proceedings. Then there was Mr. James R. Brougham, the experienced Registrar in the London Court of Bankruptcy; next, Mr. Mansfield Parkyns, the Controller in Bankruptcy, who makes an annual return as to the expenses of bankruptcy; then Mr. Henry Nicol, an officer of the Treasury, to whose care the details of the finances of the County Courts are intrusted; and, lastly, Mr. W. Hackwood, who, perhaps, more than any other professional man, has practical experience of the working of the bankruptcy system. The Committee made a Report which is now before your Lordships, and which is not the less valuable because of its conciseness. Before calling your Lordships' attention to some of the statements in the Report, it may be well that I should state that, in point of fact, the cases in which actual bankruptcy occurs in this country are rare. There are various ways in which, when a man becomes unable to meet his engagements, he and his property may be dealt with. In the first place, he may be made a "bankrupt" in technical form, and remain so until he has been "discharged" and his property has been divided among his creditors. In the second place, a man may be made a bankrupt, but that proceeding may be displaced by a composition or deed of arrangement with his creditors, which would put an end to or supersede the bankruptcy. In the third place, without a technical bankruptcy, a debtor's property may be made the subject of a deed of arrangement and distribution among his creditors. In the fourth place, the creditors, without making the debtor a bankrupt, may agree to a composition, and liberate the debtor from the full amount of his debts. Now whether there is an arrangement with bankruptcy or a composition without bankruptcy in all cases action in the matter proceeds on a resolution by the creditors, and the minority of the creditors, whether they like the arrangement or not, are bound by that which is decided by the majority. Your Lordships might like to know the comparison in point 1499 of numbers between the cases in which bankruptcy results and those in-which there are arrangements or compositions. I have got a Return for the year 1875, and I find that there were in that year adjudications in bankruptcy, 965; liquidations by arrangement, 4,233; and compositions with creditors, 2,691—so that there were as nearly as possible7,000 arrangements and compositions, as against 965 bankruptcies, or, in other words, the bankruptcies were only about one-eighth of the whole number of cases. When I came to the property dealt with, I found the results still more curious. In the same year the liabilities in the case of the bankruptcies were £6,981,240; those in the case of the liquidations by agreement no less than £12,443,999, and those in the case of compositions, £6,068,405. The assets realized were in the case of actual bankruptcies, £960,755; in that of liquidation by arrangement, £4,598,473; and in those of composition with creditors, £1,773,551. Your Lordships will see, therefore, that the interests involved in the case of liquidations and compositions are, one might almost say, infinitely larger than those involved in the case of bankruptcies proper. As these liquidations and compositions appear to be so largely favoured by creditors, it might seem that there ought to be no reason to be dissatisfied with the result. If, indeed, they were in all cases freely entered into, without compulsion or restraint, there would seem no reason for interfering; but when I lay before your Lordships a few more facts, I think you will come to the conclusion that in very many cases these liquidations and compositions are not freely entered into, but that great pressure is brought to bear on creditors in order to make them consent to such arrangements. Before I go further I will ask your Lordships' attention to this passage in the Report of the Committee— We find a general concurrence of opinion that the Act of 1869 has not in its working satisfied the expectations of the public, inasmuch as it affords great facilities for a debtor to relieve himself of his liabilities, while there is great extravagance in administering and long delay in winding up estates. Now, to show your Lordships how the system works, I will first take the case in which the debtor is actually made a bankrupt. The principle of the Act of 1500 1869 is that in this case the creditors should choose as their trustee a person in whom they have confidence, and that the trustee should undertake the responsibility of getting in and realizing the property of the bankrupt and dividing it among his creditors. In theory nothing can be more plausible than that; but it is not found to work at all well in practice. In the first place, your Lordships will find that which is not to be wondered at in a body which has no harmony—namely, that it is impossible to get all the creditors to work together. In general, only one or two would occupy themselves with the matter, but by far the greater number would interfere very little in the business, and what ought to be done by the body at large is generally left to one or two persons. It is necessary that the body of creditors should be allowed to vote by proxy, and there is scarcely a case in bankruptcy where the person who desires to become trustee does not obtain proxies from the creditors sufficient to his own appointment. The way in which trustees are appointed is thus described by the Committee— It happens, not occasionally, but so frequently as almost to form the rule, that a stranger, so far as appears on the face of the proceedings, is enabled, by the proxies he has obtained, to vote himself trustee, to fix his own remuneration, to nominate the committee of inspection, to order the payment of his costs, and finally to vote, in liquidation cases, the debtor's discharge. We report, both upon our own experience and upon the information we have collected, that nearly all the evils which have led to so much dissatisfaction with the working of the Act of 1869 can be traced to the direct or indirect effect of the proxy system; and that in our opinion no effectual check can be given to these evils so long as remunerative employment is the prize for which proxies can be used. My Lords, that is a very serious and solemn censure of the mode in which trustees are appointed; but, turning to the Report of the Controller in Bankruptcy (Parl. Paper 210), I find this further information— The total number of estates pending on the 31st of December, 1875, was 3,191….In 98 of these pending cases the trustees cannot be found. The number of reports made by me to the Courts on the conduct of trustees, during the year was 446. In 228 cases the trustees complied before the hearing of the summons; in 181 cases orders were made against the trustee, 162 of which have been complied with; in 30 cases the trustee could not be served with the summons; and 7 cases are still pending. 1501 Thus, my Lords, out of the whole number of persons entrusted with the most important of duties in connection with bankruptcy one-sixth of the whole were in default in the execution of their duties, and this in one year. But there is even worse than that, my Lords. I ask your Lordships' particular attention to these facts, which are stated by the Committee— In one case where the receipts were some £700, received by the trustee in one cheque, the costs allowed to him and to the solicitor greatly exceeded the £700. The Controller has a list of 25 bankruptcies, in which the same person was trustee, the remuneration voted to him by the creditors—i.e., by himself as their proxy—was in every case most excessive, in some instances exceeding the receipts. In only two instances did creditors personally attend, and in one it was stated by one of them that he was promised payment for attending. In another case, where the trustee had been allowed some hundreds, he claimed a further sum of £130 for closing the bankruptcy; the solicitor, who had also been allowed some hundreds, claimed £50 odd for the same six months, and an examination of the bill showed that not a dozen of the items were other than charges for doing trustee's work. Among them were journeys to see the trustee to explain his accounts, writing on same, making out trustee's accounts, fair copies of same, entering them in the trustee's books; while the accounts were the receipt of one sum on the debit side and half-a-dozen payments to the trustee and solicitor on the credit. In another, in a County Court, the receipts amounted to £107, paid to the trustees in two sums. Out of this the trustee disbursed £44 in four items, and then persuaded the creditors to vote him the balance, £63, for his remuneration. The Registrar of another Court, having struck off £150 from a solicitor's bill, the trustee called a meeting of creditors—i.e., of himself and solicitor—and voted £150 additional remuneration to the trustee, who handed it over to the solicitor. It is but just to say that where the trustee is an honest man of business the results are satisfactory. I have before me a statement of 20 bankruptcies and liquidations, in which the total receipts were £11,404, and the trustees' remuneration but £565, or 5.1 per cent, and the total solicitors' costs but £750, or 6.6 per cent. The trustee in these cases was for years a chief clerk in a County Court before 1869, when he resigned. My Lords, after these instances, your Lordships will not be surprised to hear the views which the Committee take in reference to the expense of this system. The Committee state— It may, perhaps, have been expected that the introduction of the present system of administration by paid trustees would lead to a reduction of expense, on the ground that accountants or other persons experienced in bankruptcy administration would undertake the realization 1502 and distribution of the property of debtors for a fair commission to be agreed beforehand; and that being themselves well acquainted with the rules and practice of bankruptcy, they would not need the general and costly assistance of solicitors formerly needed by unpaid and inexperienced creditors' assignees. The great majority of bankruptcies under the present Act have been wound up by professional trustees, mostly described as accountants, but a number sufficient for comparison have been wound up by creditor trustees, who, though generally accepting remuneration, appear to have been at least as dependent on their solicitors as if they had been unpaid assignees. Ninety-four bankruptcies with assets between £500 and £5,000 (averaging £1,112) which have been wound up by creditor trustees, have cost on an average £244 per estate, which seems a very large average for the class of bankruptcies, and considering that heavy Court fees are no longer levied for the expenses of the Judicial establishment. This amount, however, includes about £100charges and expenses for which the trustee is not responsible, the expenses referable to the creditor trustee being £43 for his remuneration, and about £101 for his solicitor's charges and incidental expenses. In 204 bankruptcies of the same classes (averaging £1,258), which have been wound up by professional trustees, the expenses averaged no less than £321, or (deducting £100 as above) the expenses referable to the professional trustee were 55 per cent greater than those of the creditor trustee, being £106 for the trustee's remuneration and £115 for his solicitor's charges and incidental expenses. It appears, therefore, as a rule to which there have been two or three, but only two or three, striking exceptions, that neither the experience of the professional trustees nor the large sum paid them for realizing the estate, has prevented their incurring at least as heavy solicitor's charges as when the solicitor's bill included nearly the whole charges of realization. My Lords, that is the manner in which we find that bankruptcies proper are dealt with by the trustees; but now I will refer to what appear to me to be even greater evils than those which the Controller and the Committee describe in the extracts which I have just read to your Lordships. In actual bankruptcy, abuses in the administration of the estate may be corrected if brought before the Court; but I am now about to refer to the much larger number of cases in which the control of the trustee is much greater, because in liquidation or composition the trustee is absolutely master of the situation. He is chosen, in the first instance, in the way I have described, and he decides as to debts which ought to be proved, and, in fact, as to everything which ought to be done in the liquidation of the estate, or the payment of the composition. Here is an extract from a letter addressed to me in 1503 January last by the Secretary to the Mercantile Law Amendment Society— A debtor can now file a petition, for liquidation by arrangement, and convene a meeting of his creditors at any time within a month, and almost at any place he pleases, and if at such meeting a majority in number, representing three-fourths in value of the creditors there present, or represented by proxy, pass a resolution agreeing to a composition, and such resolution is afterwards confirmed at a second meeting, by a bare majority in number and value of the creditors present, or represented, such arrangement is binding on all the creditors. As a rule, the chief creditors rarely attend such meetings, and the result is that the debtor, by the aid of proxies of friendly, bribed, oftentimes of full-secured, and sometimes of fictitious creditors, can get released from his debts upon almost any terms he thinks fit. The Controller of the Bankruptcy Court in the annual Reports to Parliament states that there has been a continued and regular decrease in the rate of composition allowed by debtors to their creditors in each year since the commencement of the Act. My Lords, that is a serious statement coming from a body of that kind. Allusion is then made to a remarkable fact commented on by the Controller in his Report of last year—namely, the increase in the number and the increase in the value of compositions. The Controller says— I have again to call attention to the increase in number and decrease in value of compositions paid to creditors under Section 126, which, continuing year by year since the commencement of the Act, can hardly be attributed to temporary causes, or explained in any satisfactory manner. The number of compositions registered has increased from 1,616 in the year 1870 to 2,691 in the year 1875, the additional 1,075 cases being thus accounted for:—Increased number of compositions—not exceeding 1s. in the pound, 465; from 1s. to 2s. 6d. in the pound, 434; from 2s. 6d. to 5s. in the pound, 300. Increase in number of compositions at the lowest rates, 1,199: decrease in number of compositions at higher rates, 124—total, 1,075. My Lords, I am sorry that what you have heard does not represent the whole of the evil, because I find that there is too much reason to believe that even those small compositions which the minority of the creditors are forced to accept are not paid. The Controller says— The loudest and most general complaints against the present system are against these arrangements and compositions, and yet practically everything is drawn into them. Out of £5,432,000 assets declared by debtors in the year 1874, £4,946,000 (or more than 90 per cent) were under these two sections. In the same year, out of 2,549 compounding debtors 1504 (under Section 126) only 162 were able to pay their creditors more than half they owed them, while 1,803 were unable to pay more than one-fourth, and 1,059 of these not more than one-eighth, including 501 debtors whose compositions averaged a few pence in the pound. The trustee, who is not unfrequently the debtor's agent, can generally, by proxies held by himself or his solicitor, resolve his own release and make his own terms with the debtor for a discharge from his debts; and as the trustee's accounts are, for some reason, specially exempted from official supervision, nothing is officially known of the results of administration except that general rules requiring the taxation of charges and other important matters are disregarded, and that the trustees appropriate the undivided balances and unclaimed dividends, which may be very largely manufactured in liquidations by arrangement, and that they can employ the funds in hand to their own advantage. The same agents practising in both, it cannot be doubted that they who profit too much in bankruptcy profit much more in liquidations, or that unless there is some hidden advantage to creditors sufficient to more than balance the many and manifest disadvantages, the surprising preponderance of liquidations by arrangement may be more reasonably attributed to the influence of agents than to discriminating preference on the part of creditors. In the year 1874 there were 4,400 liquidations by arrangement, with assets amounting to £3,462,000, against a total of 930 bankruptcies, with assets amounting to only £485,000, and the assets in the liquidation were of the class that would bear a very much larger amount to be abstracted from them by expenses or otherwise, and yet pay very much larger dividends to the creditors, there being on an average £31 assets in liquidations, and only £13 in bankruptcies, to every £100 liabilities. Now, my Lords, I have, I think, stated enough to satisfy your Lordships that there is justice in the complaints made by these creditors who are in the minority as to the way in which those liquidations and compositions are worked. I have now come to another class of serious evils which have been pointed out. In the case of liquidation by arrangement under the present system there is no audit. The creditors might be able, perhaps, by a process of law to call the trustee to account; but there is no audit that the trustee must submit to, or which any Court, by summary process, could compel him to pass. Under the old system of insolvent estates there was a very large sum of money paid into Court in the shape of dividends which were never called for. I think I am not wrong in stating that it accumulated until it amounted to some millions sterling. Some years ago that money was, by the authority of Parliament, taken for public uses—of course, on a 1505 guarantee that payment would be made out of the public funds to any persons who could prove a claim against any portion of the money so taken. But since 1869 there has been no control whatever over unpaid dividends; and this presents a serious and important question, the magnitude of which startled me when I came to consider it. There are now about 3,000 open bankruptcies—bankruptcies not closed under the Act of 1869; and between 16,000 and 17,000 arrangements and liquidations open—that is, 20,000 estates in which dividends have been declared. In this state of things the Controller has adverted to this question of unpaid dividends. He says— Under the present system, the funds collected are not paid into any public account, but left practically in the control of the trustees. The large and continually increasing balance in hand, which arises from the excess of aggregate receipts during a given period over payments accruing due during that period, cannot, therefore, be employed for the direct or indirect benefit of the creditors, except in rare cases; though a considerable portion may be employed for their own benefit by trustees who calculate on a continuance of business enabling them to pay dividends on older estates from assets to be realized in newer estates. The balance declared by trustees in bankruptcy proper for the 31st of December, 1875, amounting, with unclaimed dividends to nearly £500,000, it is probable, from the amount of assets given up, and from other circumstances connected with administration under liquidation by arrangement, that the total balance amounts to between £3,000,000 and £4,000,000. This may be a very lucrative business to some persons, as we find that one person may be trustee of 25 different estates. A trustee may keep in his hands a very large amount of unclaimed dividends, because demands on the older estates can be more than paid out of the dividends coming in from the newer ones. The Controller says it is probable that the balance amounts to between £3,000,000 and £4,000,000. But that is not the whole, because that calculation only extends to what comes under the Act of 1869; and in a Return to Parliament it is stated that under trust deeds, between 1863 and 1869, principal to the amount of £42,500,000 had been received by trustees, and I believe I am correct in stating that there has been no audit of any of those accounts; and seeing that there is a balance of between £3,000,000 or £4,000,000 since 1869, it would not be easy to speculate as to the 1506 portion of those £42,000,000 which may not yet be outstanding. Observe, my Lords, how this works—what a temptation there is to trustees to increase the amount of unclaimed dividends. Any one acquainted with dealings in the estates of insolvents knows how this can be done by a system of making frequent declarations of dividends of very small amounts—paying the money realized from the estate in such driblets that there is the greater chance of creditors not coming forward to claim their dividends. This object may be further promoted by making the declaration of dividend as little public as possible, and also by putting as many obstacles as possible in the way of those who come forward to claim. I have gone through the difficulties of the present system:—and now, my Lords, as to our remedies. I will set out by saying that we desire to preserve, as far as possible, the principle of the Act of 1869, believing it to be good and wholesome, and that the evils arise from the defective manner in which it is carried out. The first improvement we propose to make in the present system is this:—This system on the one hand affords an inducement to creditors, and especially to creditors who are inflamed by temper, to make persons bankrupt who have been guilty of no misconduct, and whose trading has been perfectly bonâ fide. On the other hand, it offers an inducement to debtors who have misconducted themselves and incurred debts without a reasonable prospect of being able to pay them to run a race with them, and force them to a composition, which is agreed to, or apparently agreed to, by a majority of the creditors. We propose that in all cases of liquidation, whether the person initiating the proceedings is a creditor or is the debtor, that application should be made to one and the same Court for what I shall term, in the first instance, liquidation. Security will be taken that the application shall be in the Court of a district where the debtor is known, and where his creditors are to be found. There is no such security now. We propose that the Court should have power in the case of a trader debtor to make a liquidation order nisi; which may be revoked if the debtor shall show that the petition is insufficient, but which, if not revoked within a specified time, shall be deemed an order absolute 1507 for liquidation. In case of a non-trader debtor, the Court will make an order nisi in the first instance, but will not make the order absolute, without direct proof. In the case of a non-trader debtor the Court, either in making the order nisi, or afterwards on making it absolute, may appoint a receiver of the debtor's property. When the order has been made absolute the debtor must, within a specified time, file a list of his creditors. All the creditors will be bound by the liquidation proceedings. Then a provisional committee of inspection will be formed to act until the first general meeting of the creditors. We propose that at the general meeting of the creditors a permanent committee of inspection should be appointed for the purpose of investigating the affairs of the debtor, and that the investigation should be held as soon as possible. The committee of inspection will appoint a receiver or trustee of the estate. At the second general meeting of creditors it would be for an adequate majority of the creditors to decide whether they would discharge the debtor or make him a bankrupt. Any proposal for a composition must be made with the knowledge of the committee of inspection; and in the adoption of such a proposal not only will a majority of the creditors be requisite, but the rights of the minority will be protected. We propose that the trustee shall be appointed, not by the creditors at large, but by the committee of inspection, and that he shall hold office at the pleasure and under the inspection of that committee at a maximum scale of remuneration. The use of proxies will be permitted; but if a trustee should use them for his own interest the Court will have a right to deprive him of his trusteeship. When the debtor has not been discharged by the second general meeting of the committee of inspection he, after six months, may apply to the Court for an order of discharge. If this be granted he will be released from all liabilities except debts incurred by fraud or breach of trust, debts due to the Crown, or penalties due to the Revenue, and, should there be any surplus of the estate, it would be paid over to the debtor. With regard to deeds of arrangements, which make over the whole property of the debtor, those will depend on the vote of a majority excluding secured creditors. We 1508 propose, further, that all accounts in bankruptcy and in liquidation shall be audited, and that in all cases, whether the bankruptcy or the liquidation be closed or not, the whole of the property remaining in the hands of the trustees shall at the end of two years be paid into Court, so that there may be every inducement to the trustees to close each case, where it is possible, within two years. There are various minor provisions in the Bill to which I need not at this moment refer; but I may be allowed to say that the measure proposes to repeal the Act of 1869, so that the Bill may be complete in itself, containing the entire law on the subject with which it deals. I have only to add that, if the Bill receives your Lordships' sanction, I propose to introduce a Bill making corresponding alterations in the Debtors Act of 1869. I have only now to lay this Bill upon the Table, and ask your Lordships to read it a first time.