A History of Bankruptcy

A History of Bankruptcy

Bankruptcy or insolvency is the legal status of a person or an organization that cannot repay the debt it owes to its lenders (creditors). Bankruptcy law is the legal remedy available for the recovery of debt.

The concept of debt forgiveness can be traced back to the Old Testament. There it is stated that every seventh year debts shall be eliminated. Those Israelites who had sold themselves into slavery should be freed. In ancient Greece, the notion of debt forgiveness was unknown. If a man owed a debt and could not pay, he and his family would become debt slaves. Most Greek regions limited the period to five years and the debt slaves had protection of life and limb, which regular slaves did not.

It is believed that the term “bankruptcy” comes from the Latin words bancus (bench or table) and ruptus (broken). When a banker in Medieval Italy, who originally conducted his business on a bench in a public marketplace, was unable to continue lending and meet his obligations, the bench was broken as a symbolic show of failure and inability to negotiate.

Bankruptcy law was introduced to provide and govern an orderly and equitable liquidation of the estate of the insolvent debtor. In England, that first insolvency laws were introduced with the Bankruptcy Act of 1542. At this time, the bankrupt was considered a criminal and thus subject to criminal punishment.

Before the 20th century, rules and practices governing insolvency tended to favor the creditors and were harsher towards the bankrupt. The aim was to recover the investments of the creditors. The concept of voluntary bankruptcy did not exist.

One important development was the introduction of the Joint Stock Company. These companies had a separate legal character, the ability to sue and be sued served as a suitable mechanism for raising capital through the issuance of shares. Prior to the Joint Stock Company people who lent money to a company that had gone broke, could sue the shareholders to pay off all the debts, but with the Joint Stock Company the shareholders’ liability became limited to the amount they had paid in their shares.

The principal focus of modern bankruptcy legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities. Instead, it is the remodeling of the financial and organizational structure of debtors in financial distress to permit the rehabilitation and continuation of the business that is the main objective.

In Canada, bankruptcy and insolvency are governed by two principal pieces of federal legislation. The Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA). In addition, the different Canadian provinces also have bankruptcy legislation, such as, the Quebec Bankruptcy and Insolvency laws included in the Quebec Code of Civil Procedure.