bankruptcy bankruptcy: deeds of arrangement: constitutionality of bankruptcy act 1924 parts xi and xii: history of bankruptcy law: Power of commonwealth to make laws with respect to insolvency
Bankruptcy Act 1924 Parts XI, XII: Constitution s 51(xvii)
At the Premiers’ Conference held in June 1933 the Assistant Treasurer, New South Wales, suggested that ‘as a separate Commonwealth Deeds of Arrangement Act would not be constitutional, the Federal Government might consider the repeal of Parts XI and XII and allow the States exclusively to legislate for deeds of agreement’.
In his letter to the Attorney-General dated 3rd July 1933, the Assistant Treasurer summarises his view as follows:
- The most desirable legislation is a Federal Deeds of Arrangement Act. As to the constitutional questions involved, I can offer no opinion;
- If the Constitutional doubt preludes a Federal Deeds of Arrangement Act, I am of opinion that the Federal Government should quickly take all the necessary steps to enable the States to legislate for Deeds of Arrangement; and
- The third proposal to amend the present Act is the least satisfactory because …
The Assistant Treasurer has not stated the grounds of his constitutional objection and, consequently, a general review of the constitutional powers of the Commonwealth to make laws relating to Deeds of Arrangement becomes necessary.
Distinction between bankruptcy and insolvency
The first Bankruptcy Act was passed in England during the reign of Henry VIII and its provisions were confined to traders. There also existed in England, concurrently with bankruptcy legislation, insolvency laws—the so-called ‘Lords Acts’, ‘Lord Bedesdale’s Act’ and ‘Relief of Insolvent Debtors Acts’—for the benefit of non-traders, and this was the case until the distinction between bankruptcy and insolvency was abolished in 1861, at which time, the two systems, owing to the universal drift of humanitarian legislation for the abolition of imprisonment for debt, were merged. In an insolvency law, the effects, present or future, of the debtor were not released, but only his person, while a bankruptcy law had the effect of releasing both the person of the debtor and his effects from his debt.
Bankruptcy being originally designed for merchants and traders only and being involuntary until the two systems of bankruptcy and insolvency merged in 1861, is essentially a commercial regulation, and its main objects are administration and distribution. Insolvency laws, on the other hand, were based upon the inability of debtors to pay their debts, and action was taken against the person of the debtor.
Insolvency legislation took from the plaintiff altogether the power of prolonging at his own pleasure the defendant’s incarceration and enabled the debtor on his imprisonment to petition for his discharge from prison upon consideration of his estate being transferred for the benefit of his creditors in general and to obtain his discharge unless a case of fraud, malicious injury or other misconduct be established.
Brief outline of English bankruptcy law
The earliest English Statute relating to Bankruptcy was 34 and 35 Hen. VIII. c.4. and was shortly followed by 13 Eliz. c.7. The former Act applied to all fraudulent debtors, the latter to traders only. The distinction between traders and non-traders existed until 1861. Under these Acts, recourse would be had against not only the property but also the person of the debtor. A bankrupt was treated in a sense as a criminal and it was not until 4 and 5 Anne c.4. that a trader who had surrendered all his effects could get his discharge. In 1825 all previous statutes on the subject were repealed by 6 Geo. IV c.16. Incidentally this Act first introduced the principle of deeds of arrangement. In 1849, the Bankruptcy law was consolidated (12 and 13 Vict. c.106). This Act relaxed the requirements of the earlier law relating to deeds of arrangement. In 1861 (24 and 25 Vict. c.134.) the law of bankruptcy was extended to non-traders and the necessity of a ‘cessio bonorum’ in a deed of arrangement abolished and the proportion of assenting creditors necessary to bind the minority was materially decreased. In 1869, a further Bankruptcy Act was passed. This Act introduced a system of liquidation by arrangement and compositions with creditor without recourse to bankruptcy but it was not a success as it omitted any provision for the scrutiny into the administration of debtors’ estates in the cases of liquidation by arrangement.
As to the extent to which the laws of the States adopted this Act, see infra p.(1)
The Bankruptcy Act 1883 (Chamberlain’s Act) abandoned liquidation by arrangement and gave the Board of Trade general powers of supervision.
The reasons why the Act of 1883 was passed were discussed in the cases of ex parte Reed v. Bowen (1886) 17 Q.B.D. 244 and ex parte Hester in re Hester (1889) 22 Q.B.D. 639. In the former case Lord Esher M. R. said—
In my opinion, this Act was passed because it had been proved to the satisfaction of the legislature that a majority of creditors, however large, was not careful, and was not to be trusted; that, on the contrary, the creditors were generally utterly careless, that they wrote off debts as bad, and agreed to terms which might give them some possibility—an evanescent chance—of their getting something out of the wreck. It was because of the known and proved behaviour of creditors with regard to their insolvent debtors that this Act was passed, taking away from the majority of creditors that power which they had so recklessly and carelessly used and putting a controlling power in the hands of the Court for the purpose of protecting the creditors against their own recklessness.
Lindley L.J. concurred and Lopes L.J. said—
I think the objects were these, to protect a prudent minority of creditors against a reckless majority and also to protect a reckless majority against themselves.
In the latter case, Fry L.J. said—
We are not only bound to regard the interests of the creditors themselves who are sometimes careless of their best interests, but we have a duty with regard to the commercial morality of the country.
In 1887, a Deeds of Arrangement Act was passed. This Act merely provided machinery for registering certain classes of deeds.
It will be noted that, from 1825 until 1887 deeds of arrangement were dealt with in the many Bankruptcy Acts. In 1890 deeds of arrangement were dealt with again in the Bankruptcy Act. Section 25 of this Act required trustees to furnish returns to the Board of Trade.
This was the state of the English Bankruptcy law at the date of passing of the Commonwealth of Australia Constitution Act.
Deeds of arrangement
Under the English Bankruptcy Acts of 1849 and 1861 non-official arrangements by deed between a debtor and the general body of his creditors were not only officially recognised but were in certain circumstances made binding on all creditors, including those who did not assent to them. Under the Bankruptcy Act 1849, the proceedings under the ‘liquidation by arrangement’ and ‘composition’ clauses were practically private arrangements by resolution instead of deed and were proved by experience to be open to the same abuses. Under the Act of 1883, no arrangements either by deed or resolution have any force unless confirmed by the Bankruptcy Court. The result of this was that private arrangements were made and kept secret. The Deeds of Arrangement Act 1887 was passed to compel disclosure of such arrangements by declaring them void unless registered. By s. 25 of the Bankruptcy Act 1890, trustees under deeds are compelled to lodge accounts with the Board of Trade.
States of the Commonwealth
At the date of the commencement of the Commonwealth Constitution, the following Acts were in force in the various States:
New South Wales
Bankruptcy Act 1898—This Act consolidated the previous Bankruptcy Acts. Under this Act deeds of conveyance or assignment for the benefit of creditors might be registered and, if so were registered within one month, were within the protection of the Act. This provision was taken from the New South Wales Act 1887 which was in turn taken from Chamberlain’s English Act of 1883.
Section 127 of the Bankruptcy Act 1887 (New South Wales) provides that the jurisdiction in insolvency as exercised by the Supreme Court under the previous legislation is thereafter included as the Bankruptcy jurisdiction of the Supreme Court under the New Act and the entire jurisdiction in insolvency is ‘hereby transferred to the Supreme Court and shall be exercised by the Judge in Bankruptcy’. Further, whenever the terms ‘Insolvency’ and ‘Insolvent’ are used in any Act in force after the passing of the Act, those terms shall include the terms ‘Bankruptcy’ and ‘Bankrupt’ respectively.
Insolvency Acts 1890 and 1897—These Acts were based on the English Bankruptcy Act of 1869 but also contained provisions adopted from the English Bankruptcy Acts 1883 and 1890. ‘Part XII—Deeds of Arrangement’ in the Commonwealth Act was taken from Part VI of the Victorian Insolvency Act 1897.
The Insolvent Act 1886 was a consolidation of laws relating to insolvent debtors but all the laws which were consolidated in this measure were passed prior to the English Act of 1883. Part XI of the Commonwealth Act was taken from this Act.
Insolvency Act 1874 and 1893—These Acts were also based on the English Act of 1869. Provision is made for administration in bankruptcy on an order adjudicating the debtor insolvent. The creditors may subsequently accept a proposal for a composition or scheme.
The Bankruptcy Act of 1892 was adopted from the English Acts of 1883 and 1890. In 1898 it was altered to include Part XI of the South Australian Act.
The Bankruptcy Act 1870 is practically identical with the English Act of 1869. It was amended in 1899. Section 115 of the 1870 Act provides that where reference is made to Insolvency the same shall be construed to mean bankruptcy. This Act contained provisions relating to Liquidation by arrangements.
It will thus be seen that the law in all the States was based on the English Bankruptcy Law and that in the three States that passed laws under the titles of Bankruptcy Acts provision of some kind was made relating to arrangements.
Commonwealth of Australia Constitution
As stated previously, the Commonwealth has power to make laws relating to bankruptcy and insolvency.
The United States Constitution gives power to make laws on the subject of bankruptcies and the British North America Act gives to the Dominion Parliament exclusive power to make laws with respect to bankruptcy and insolvency.
The words (bankruptcy and insolvency) describe in their known legal sense provisions made by law for the administration of the estates of persons who become bankrupt or insolvent, according to rules and definitions prescribed by law, including of course the conditions in which that law is to be brought into operation, the manner in which it is to be brought into operation and the effect of its operation. (Lord Selbourne—L’Union St. Jacques de Montreal v. Dame J. Belisle LR 6 P.C. 31.)
The Constitution gives power to Congress to establish uniform laws on the subject of bankruptcies throughout the United States. In 1789 ‘bankruptcy’ and ‘insolvency’ had, in English law, different and distinct meanings. Generally the technical terms in the American Constitution are given the meanings they had when the Constitution was adopted but from the beginning Congress and the Supreme Court gave the term ‘bankruptcy’ a meaning broad enough to cover ‘insolvency’ as well.
In Sturges v. Crowninshields (4 Wh. 122) C. J. Marshall said ‘This difficulty of discriminating with any accuracy between insolvent and bankrupt laws would lead to the opinion that a bankrupt law may contain those regulations which are generally found in insolvent laws; and that an insolvent law may contain those which are common to a bankrupt law’. Further the Chief Justice stated:
But if an act of congress should discharge the person of the bankrupt and leave his future acquisitions liable to his creditors, we should feel much hesitation in saying that this was an insolvent, not a bankrupt act and therefore unconstitutional. Another distinction has been stated and has been uniformly observed. Insolvent laws operate at the instance of an imprisoned debtor; bankrupt laws at the instance of a creditor.
(This judgment was given in 1819 when no provision was made for voluntary petitions).
In Hanover National Bank v. Moyses (186 U.S. p. 181) the Supreme Court reviewed the authorities on this subject. Quoting from Story’s Commentaries (Chapter XVI § 1111), the Chief Justice said ‘it is believed that no laws ever were passed in America by the colonies or states which had the technical denomination of “Bankrupt laws”. But insolvent laws, quite co-extensive with the English bankrupt system in their operations and objects, have not been infrequent in colonial and state legislation. No distinction was ever practically, or even theoretically, attempted to be made between bankruptcies and insolvencies’.
Mr. Justice Catron in re Klein (I. How. 265, 277) held the Bankrupt Act of 1841 to be constitutional and in doing so stated:
I hold (the jurisdiction of Congress) extends to all cases where the law causes to be distributed the property of the debtor among his creditors; this is the least limit; its greatest is the discharge of a debtor from his contracts and all intermediate legislation, affecting substance and form but tending to further the great end of the subject—distribution and discharge—are within the competency and discretion of the Congress. With the policy of a law, letting in all classes others as well as traders, and permitting the bankrupt to come in voluntarily and be discharged without the consent of his creditors, the courts have no concern it belongs to the lawmakers.
In re Tarnowski (49 A.L.R. 686) the Wisconsin Supreme Court held that the insolvency laws of the State are completely superseded by the Federal Bankruptcy Act as to all matters comprehended within that legislation.
It is now the settled law of the United States that from the effective date of a Federal Bankruptcy Act, a provision of a State insolvency law for the discharge of a debtor is suspended thereby.
In 1933 Congress passed an amending Bankruptcy Law which deals with compositions and schemes in relation to farmers’ relief. It is clear that in the United States, laws on the subject of bankruptcies cover the widest possible grounds and it would appear that the constitutionality of Parts XI and XII of the Commonwealth Act if incorporated in an Act of Congress would not be questioned.
The words ‘bankruptcy’ and ‘insolvency’ were discussed in H v. Chandler (1 Hannay 556).(2) Ritchie C.J. quoted from Lord Abinger in Parker v. Gossage (2 C.H. and R. 617) where he stated that—
The natural sense of the word ‘bankrupt’ is a man who has been bankrupt according to law though it is metaphorically used to denote an insolvent person.
The Chief Justice also drew attention to the United States where Congress has power to make bankruptcy laws and the State insolvency laws. Quoting from Sturges v. Crowninshields the C.J. said—
The insolvent laws of many indeed by far the greater number of the States discharge the person of the debtor but leave his obligation to pay in full force.
Again, quoting from Chancellor Kent in the same case he said—
There is a marked difference in general between bankrupt and insolvent laws for while the bankrupt may be discharged from his debts, the insolvent debtor is usually only discharged from imprisonment. But the line of partition between bankrupt and insolvent laws is not so distinctly marked as to enable any person to say with positive precision what belongs to the one and not to the other class of laws. It is difficult to discriminate with accuracy between bankruptcy and insolvency laws and therefore a bankrupt law may contain those regulations which are generally found in insolvency laws and an insolvent law may contain those which are common to a bankruptcy law.
Again the Chief Justice stated that the Acts relating to insolvent debtors were—
based solely on the utter inability of the debtor to pay his debts or support himself, and being so insolvent in the full, ordinary and legal sense of the term, they deal with his insolvency and provide specially and primarily for his personal discharge, and incidentally for the disposition of any property he may possess it being, we think, very evident that the Legislature contemplated that as those for whose benefit the Act was passed were in actual custody the great bulk of them were utterly insolvent, with no available means for the discharge of their obligations or even for their personal support in custody.
In Edgar v. Central Bank (15 App. Rep. Ont. p. 193) Burton J.A. said ‘Bankruptcy has to do chiefly with the vesting and equal distribution of the Estates of such persons as have voluntarily or involuntarily been declared bankrupt by a court of competent jurisdiction while insolvent laws have generally to deal with discharge from arrest or custody of such persons as under the terms prescribed by law make a general cession of all their property for the benefit of their creditors’.
In Attorney-General of Ontario v. Attorney-General of Canada (1894 A.C. p. 189) the Lord Chancellor said—
It appears to their Lordships that such provisions as are found in the enactment in question (Revised Statutes of Ontario C. 124 s. 9 relating to purely voluntary assignments and postponing thereto judgments and executions not completely executed by payment), relating as they do to assignments purely voluntary, do not infringe the exclusive legislative power conferred on the Dominion Parliament. They would observe that a system of bankruptcy legislation may frequently require various ancillary provisions for the purpose of preventing the scheme of the Act from being defeated.
This view is confirmed by Chatterton v. City of London Brewery (1915 A.C. 631) where Earl Loreburn stated that in his opinion it is giving too pregnant a sense to the words of the Act to say that ‘bankruptcy matters’ mean merely matters where there is already a bankruptcy. He continued—
I think the words ‘bankruptcy matters’ include at all events matters which come within the jurisdiction of the Bankruptcy Court and within the jurisdiction of that Court alone.
The matter under review was considered by Lukin J. in re Paravicini (3 A.R.C. 18).(3) He stated—
what were the systems in regard to bankruptcy and insolvency with which the subjects of Great Britain and Australia were familiar? The answers are contained in the English and Australian Bankruptcy and Insolvency Acts then in force. We find that the whole of the Australian Commonwealth Act is based, just as the Bankruptcy and Insolvency laws of each individual State in Australia has in the past been based, on the legislation of England on that subject.
In conclusion the Commonwealth has power to make laws with respect to ‘bankruptcy and insolvency’. The word ‘insolvency’ enlarges the sense of the power given but the Bankruptcy Act, including Parts XI and XII, would apparently fall within the power to make laws with respect to ‘bankruptcy’. The Commonwealth has not yet exercised its powers with respect to ‘insolvency’ in the more limited sense but it could, if it wishes, make laws relating to the imprisonment of debtors.
Validity of Parts XI and XII of the Commonwealth Act
In pursuance of power to make laws with respect to bankruptcy and insolvency, the Bankruptcy Act 1924 was passed, Part XI of which relates to compositions and assignments without sequestration and Part XII to Deeds of Arrangement.
The Commonwealth Act is the Bankruptcy Act—its long title being ‘An Act relating to Bankruptcy’. It is now settled law that the title of a Statute is an important part of an Act and may be referred to for the purpose of ascertaining its general scope but, apparently, the construction of a Statute is not limited by its title. (Maxwell, Interpretation of Statutes, p. 75). Reference to the long or short titles of a statute for the purposes of interpretation must always be secondary to reference to the enacting part, for the title may be colourless or the Act may deal with subjects not expressed in the title (Craies on Statute Law p. 177). Even assuming the word ‘bankruptcy’ was used in its restricted sense in the long and short titles to the Act, the Act should be construed so as to give full effect to the intention of the legislature which was clearly to make the provisions contained in Parts XI and XIII.
I am therefore of opinion that Parts XI and XII are constitutional and are properly included in the Bankruptcy Act 1924–1932.
[Vol. 26, p. 479]
(1) The page number is missing in the Opinion Book.
(2) See also (1869) 12 NBR 556.
(3)  3 ABC 15