History United Kingdom insolvency law

w shakespeare, merchant of venice (1598) act iv, scene i

the history of corporate insolvency law in uk began first modern companies legislation in 1844. however, many principles of insolvency rooted in bankruptcy laws trace ancient times. regulation of bankruptcy necessary part of every legal system, , found in hammurabi code (2250 bc), twelve tables of roman republic (450 bc), talmud (200 ad), , corpus juris civilis (534 ad). ancient laws used variety of methods distributing losses among creditors, , satisfaction of debts came debtor s own body. debtor might imprisoned, enslaved or killed or three. in england, magna carta 1215 clause 9 set out rules people s land not seized if had chattels or money repay debts. bankruptcy act 1542 introduced modern principle of pari passu (i.e. proportional) distribution of losses among creditors. however, 1542 act still reflected ancient notion people not pay debts criminals, , required debtors imprisoned. fraudulent conveyances act 1571 ensured transactions debtor intent delay, hinder or defraud creditors , others of , lawful actions , utterly void . view of bankrupts subject total of creditors, represented shylock demanding pound of flesh in shakespeare s merchant of venice, began wane around 17th century. in bankruptcy act 1705, lord chancellor given power discharge bankrupts having repay debts, once disclosure of assets , various procedures had been fulfilled. nevertheless, debtors prison common end. prisoners required pay fees prison guards, making them further indebted, bound in manacles , chains, , sanitary conditions foul. 18th century scandal broke after friend of tory mp died in debt prison, , in february 1729 gaols committee reported on pestilent conditions. nevertheless, basic legislative scheme , moral sentiment remained same. in 1769, william blackstone s commentaries on laws of england remarked not justifiable person other trader encumber himself debts of considerable value. , @ end of century, lord kenyon in fowler v padget reasserted old sentiment that, bankruptcy considered crime , bankrupt in old laws called offender.

the marshalsea debt prison, 1 of numerous london prisons, insolvent debtors including charles dickens father, closed after debtors act 1869. imprisonment debt contrary echr, protocol 4, article 1.

since south sea company , stock market disaster in 1720, limited liability corporations had been formally prohibited law. meant people traded living ran severe risks life , health if business turned bad, , not repay debts. however, industrial revolution view companies inefficient , dangerous, changing. corporations became more , more common ventures building canals, water companies, , railways. incorporators needed, however, petition parliament local act. in practice privilege of investor limit liability upon insolvency not accessible general business public. moreover, astonishing depravity of conditions in debtors prison made insolvency law reform 1 of intensively debated issues on 19th century legislative agenda. 100 bills introduced parliament between 1831 , 1914. long reform process began insolvent debtors (england) act 1813. established specialist court relief of insolvent debtors. if assets did not exceed £20, might secure release prison. people traded living, bankrupts (england) act 1825 allowed indebted bring proceedings have debts discharged, without permission creditors. gaols act 1823 sent priests sent in, , put debtor prison jailors on state s payroll, did not claim fees inmates. under prisons act 1835 5 inspectors of prisons employed. insolvent debtors act 1842 allowed non-traders begin bankruptcy proceedings relief debts. however, conditions remained object of social disapprobation. novelist charles dickens, own father had been imprisoned @ marshalsea while child, pilloried complexity , injustice through books, david copperfield (1850), hard times (1854) , little dorrit (1857). around time reform began.

the difficulties individuals discharged debt in bankruptcy proceedings , awfulness of debtors prison made introduction of modern companies legislation, , general availability of limited liability, more urgent. first step joint stock companies act 1844, allowed companies created through registration rather royal charter. accompanied joint stock companies winding-up act 1844, envisaged separate procedure bring company end , liquidate assets. companies had legal personality separate incorporators, limited liability act 1855 company s investors protected debts upon company s insolvency. 1855 act limited investors liability amount had invested, if bought shares in company ran massive debts in insolvency, shareholder not asked more had paid in. thus, risk of debtors prison reduced. after, reforms made indebted people. bankruptcy act 1861 passed allowing people, not traders, file bankruptcy. debtors act 1869 abolished imprisonment debt altogether. legislative scheme of period came resemble modern law. while general principle remained pari passu among insolvent company s creditors, claims of liquidators expenses , wages of workers given statutory priority on other unsecured creditors. however, creditor had contracted security interest first in priority queue. completion of insolvency protection followed uk company law s leading case, salomon v salomon & co ltd. here whitechapel bootmaker had incorporated business, because of economic struggles, had been forced insolvency. companies act 1862 required minimum of 7 shareholders, had registered wife , children nominal shareholders, though played little or no part in business. liquidator of mr salomon s company sued him pay outstanding debts of company, arguing should lose protection of limited liability given other shareholders not genuine investors. salomon s creditors particularly aggrieved because salomon himself had taken floating charge, on company s present , future assets, , claims debt against company had ranked in priority theirs. house of lords held that, though company one-man venture in substance, duly registered have protection of companies acts in event of insolvency. salomon s case completed process 19th century reforms because person, smallest business, have protection destitution following business insolvency.

the financial collapse of 2007–2008 led bank run on northern rock, first since overend, gurney & co in 1866. northern rock, lloyds tsb , rbs nationalised £650bn. after this, banking act 2009 created specific insolvency regime banks, reduced lending, , economic activity large numbers of businesses failed.

over 20th century, reform efforts focused on 3 main issues. first concerned setting fair system of priority among claims of different creditors. centred upon ability of powerful contractual creditors, particularly banks, agree take security interest on company s property, leaving unsecured creditors without remaining assets satisfy claims. after salomon s case , controversy created on use of floating charges, preferential payments in bankruptcy amendment act 1897 mandated preferential creditors (employees, liquidator expenses , taxes @ time) had priority on holder of floating charge (now ia 1986 section 175). in enterprise act 2002 further major change create ring-fenced fund unsecured creditors out of around 20 per cent of assets subject floating charge. @ same time, priority taxpayers claims abolished. since then, debate further reform has shifted whether floating charge should abolished altogether , whether ring-fenced fund should taken fixed security interests. second major area reform facilitate rescue of businesses still viable. following cork report in 1982, insolvency act 1986 created administration procedure, requiring (on paper) managers of insolvent businesses attempt rescue company, , act in creditors interests. after enterprise act 2002 wholly replaced receivership rules secured creditors, floating charge on assets, run insolvent company without regard claims of unsecured creditors. third area of reform concerned accountability people worsened or benefited insolvencies. recommended cork report, company directors disqualification act 1986 meant directors breached company law duties, or committed fraud prevented working directors 15 years. insolvency act 1986 section 214 created liability wrongful trading. if directors failed start insolvency procedures when ought have known insolvency inevitable, have pay additional debts run through prolonged trading. furthermore, provisions on fraudulent conveyances extended, transaction @ undervalue or other preference (without bad intent) avoided, , unwound insolvent company.

the financial crisis of 2007, resulted insufficient consumer financial protection in us, conflicts of interest in credit rating agency industry, , defective transparency requirements in derivatives markets, triggered massive rise in corporate insolvencies. contemporary debate, particularly in banking sector, has shifted prevention of insolvencies, scrutinising excessive pay, conflicts of interest among financial services institutions, capital adequacy, , causes of excessive risk taking. banking act 2009 created special insolvency regime banks, called special resolution regime, envisaging banks taken on government in extreme circumstances.