The treatment of individuals and businesses in debt has (happily) evolved over time. Andy Wood of Wilson Field provides an overview of how things were, and how things have changed.
From the early days of money as we know it, people have encountered financial difficulties. Whether the cause is unforeseen circumstances, poor management or extravagance, the end result is the same.
In ancient Roman law, the legal concept fallitus ergo fraudator meant ‘insolvent thus a swindler’. The idea was that bankrupts were dishonest. In reality, there are of course honest and dishonest bankrupts, as there are honest and dishonest people. The state of insolvency doesn’t change an individual’s character.
Though avarice may play a part in many instances, in general, there is no proven correlation between bankruptcy and dishonesty.
Punishment and humiliation
Old Roman law had a long-lasting impact on insolvency law across much of Europe. Bankrupts were often treated punitively and, in exceptional cases, their situation could even amount to a capital offence.
De debitore in partes secando was the privilege given to creditors allowing them to cut the debtor’s body into pieces and share it out proportionately, according to the size of debt. Perhaps it was intended as a threat, as it’s believed that it was rarely, if ever, used in practice.
The most widely-accepted theory about the origin of the word 'bankrupt' comes from combining the ancient Latin words bancus (bench or table) and ruptus (broken). When a trader or banker who conducted their public marketplace transactions on a bench was unable to continue to meet obligations, the bench was broken in a symbolic show of failure.
The English and French were among those who prescribed the death penalty for bankruptcy, though it was infrequently exercised. In Tudor England you could be pilloried (a pillory being hinged wooden boards forming holes through which the head and/or various limbs were inserted), and have one ear nailed to it and then cut off once you were deemed to have paid your penance.
The punishment for bankrupts in northern Italy in the Middle Ages was a peculiar sight. A bankrupt would hit their bare backside against a rock three times before a jeering crowd and shout, “I declare bankruptcy”. The focus was incontrovertibly on punishment and humiliation.
Other punishments included slavery and debtors' prison, such as the notorious Marshalsea and Fleet prisons in London. Debtors were by far the largest element in the British 18th-century prison population, who were often tradespeople who had fallen on hard times. In 1869, the Debtors Act heralded the beginning of the end for debtors’ prisons in the UK (Gazette issue 23524).
The role of The Gazette
Bankrupts were not only punished, but their situation was also published to warn creditors to be cautious when dealing with the debtor. Bankruptcy proceedings have been recorded in The Gazette since the 18th century in order to place notices in the public domain. By 1712, insolvent debtors and meetings of creditors were detailed, and by 1750, dissolutions of business partnerships.
In November 1761, John Perrott was unfortunate to be one of the few people in England to be hanged for ‘fraudulent bankruptcy’. His story has all the ingredients for a film – intrigue, deceit, a mistress and a gruesome ending.
His crime was not mere bankruptcy. He had been hiding assets and syphoning money to his mistress to the detriment of his creditors. After refusing to make full disclosure, he took that information to the gallows at Smithfield, and to his grave, age 38.
There are multiple notices to creditors concerning Perrott in The Gazette, even as late as 1765 (Gazette issue 10510), with his original bankruptcy notice appearing in 1760 (Gazette issue 9946). In June 1761, a warrant was issued to detain Perrott for ‘having feloniously concealed from his Creditors a great Part of his Estate and Effects’ (Gazette issue 10116).
In many western countries, including Britain, the approach to bankruptcy has thankfully evolved, with the focus moving away from punishment and retribution to allowing the debtor the chance of a fresh start.
The Gazette has a statutory duty to publish bankruptcy and insolvency notices, but you will also find published discharge from bankruptcy notices (notice code 2515) and annulments and rescindments (notice code 2512).
The same approach is taken with corporate insolvencies; that is, to salvage the business, rather than just terminate its existence. It follows that, at least in theory, most parties should be better off than if it is simply shut down and liquidated. It is seen as a better result for creditors, for employees, for the owners and, in the bigger scheme of things, for the economy as a whole, if individuals and businesses remain productive.
There may no longer be a threat of capital punishment, but running an insolvent business can be extremely stressful. The threat of bailiffs or legal action; phone calls from pressing creditors; sleepless nights worrying about the inability to pay the rent or staff wages; the threat of losing a home and the business; and making staff redundant – none of this is for the faint-hearted. But there are organisations and charities which can provide support during this difficult time.
Slowly, the perceived stigma attached to bankruptcy and insolvency is diminishing as attitudes change, but it remains the case that most people find the whole matter extremely stressful. Advice to anybody facing these problems is simple: the sooner that these are addressed through specialist advice, the better the prognosis for the future.
About the author
Andy Wood is associate director at Wilson Field. Former R3 Yorkshire and Humberside regional chairman and committee member, Andy is a licensed insolvency practitioner.
Image: Merchant of Venice, illustration