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328
BANKRUPTCY

of any partner or co-obligant with him. Neither does it release the bankrupt from liability to criminal prosecution.

Composition or Scheme of Arrangement.

After a receiving order has been made the debtor may submit a proposal for the payment of a composition, or for the liquidation of his affairs, by a trustee or otherwise, without adjudication. The proposal must be lodged with the official receiver in sufficient time to allow notice, together with a report by that officer, to be sent to the creditors before the meeting is held at which it is to be considered. If the proposal is entertained at the meeting by a majority in number and three-fourths in value of all the creditors who have proved their debts, and if it is thereafter approved by the court, it becomes binding upon all creditors who would be bound by an order of discharge had the debtor been adjudicated bankrupt. A similar proposal may be made after adjudication, and if entertained by the creditors and approved by the court, the adjudication may be annulled. The debtor's release will be subject to the terms of the scheme, but his future acquired property will not pass to the creditors unless there is an express stipulation to that effect. If default is made in carrying out the scheme, or if it is found that it cannot proceed without injustice or undue delay, the court may at any time adjudicate the debtor bankrupt, in which case the scheme will fall to the ground, except in respect of past transactions under it. The approval of a composition or scheme does not release the debtor from his liabilities under the criminal law, nor from the necessity of undergoing a public examination which must, in fact, be held and concluded before the approval of the court is applied for. Also before such approval is given a report must be filed by the official receiver upon its terms and on the conduct of the debtor, and the court must be satisfied after hearing that officer and any creditor, that the proposal is reasonable and calculated to benefit the creditors, and that no criminal offences connected with the bankruptcy have been committed by the debtor. Further, if any fact is proved which would have prevented the debtor from obtaining an absolute or unconditional order of discharge had he been adjudged bankrupt, the composition or scheme cannot be approved unless it provides reasonable security for the payment of not less than seven shillings and sixpence in the pound on all the unsecured debts. Where a trustee is appointed to carry out the composition or scheme, all the provisions of the act with reference to the remuneration of the trustee, the custody of funds, the audit of his accounts and the control exercised by the Board of Trade apply in the same manner as they would under an adjudication. Further, the provisions relating to the administration of property, proof of debts, dividends, &c., will also apply, so far as the nature of the case and the terms of the arrangement admit.

Property divisible among the Creditors.

No part of the law of bankruptcy is more intricate, or has been the subject of more litigation than this, and any detailed view of the effect of legal decisions can only be gathered by a perusal of the cases; but the following general principles may be stated:—The term "property" includes not only property of which the bankrupt is the true owner, but property in his possession, order or disposition in his trade or business with the consent of the true owner, in such circumstances that he is the reputed owner thereof. The application of the doctrine of reputed ownership has been considerably restricted in recent years by the growth of alleged trade customs, in accordance with which property is frequently lent under a contract of "hire and purchase" or otherwise; and by the decisions of the courts that where such custom is sufficiently proved the doctrine does not apply. Further, the trustee's title not only includes property in the actual possession of the bankrupt, but relates back to the date of the first act of bankruptcy committed by him within the three months preceding the presentation of the bankruptcy petition, and thus invalidates all payments and assignments to creditors made during that period with knowledge on the part of the creditor or assignee of the commission of the act of bankruptcy. In such cases the trustee may, therefore, require the money or property to be restored to the estate. And even where no prior act of bankruptcy is proved, any payment made to a creditor with the view of giving such creditor a preference over the other creditors, within the three months preceding the presentation of the petition on which the payer is made bankrupt, is rendered void as against his trustee. Settlements of property within the two years preceding the bankruptcy, unless made before and in consideration of marriage, or made in good faith for valuable consideration, are also void, as are similar settlements within ten years, unless it is proved that the settlor was (independently of the settled property) solvent at the date of the settlement, and that the interest in the property passed to the trustees on the execution of the deed. The same rule applies to covenants to settle in consideration of marriage future-acquired property in which the debtor had no interest at the date of the marriage (other than property acquired by the bankrupt through his wife), if such property is not actually transferred before the bankruptcy. Executions by a creditor not completed at the date of the receiving order are also void, and the proceeds of an execution in the hands of the sheriff must, with certain exceptions and subject to deduction of costs, be handed over to the trustee. But all property held by the bankrupt on trust, and tools of trade, wearing apparel and bedding to a total value not exceeding £20, are excluded from the property divisible among the creditors. With respect to property acquired by the bankrupt, whether by gift or legacy, or consisting of accumulations of business or other profits after the commencement of the bankruptcy, and before he obtains his discharge, the trustee's title also prevails; but bona-fide transactions by the debtor for value, other than transactions relating to freehold property, appear to be valid. Where the bankrupt is a beneficed clergyman the trustee may, subject to certain provisions for the due discharge of the duties of the office, apply for the sequestration of the profits of the benefice; and where he is in receipt of a salary, income or pension, &c., the court may order any part thereof to be paid to the trustee, but where he is an officer of the army, navy or civil service, such order is only to be made with the consent of the chief of the department concerned.

Claims of Creditors and Dividends.

In the distribution of the debtor's property certain claims are entitled to priority over others. Thus the landlord, although not entitled to a preference out of the funds in the hands of the trustee, can distrain for unpaid rent on the goods and effects of the debtor remaining on the landlord's premises, but where the distraint is levied after the commencement of the bankruptcy this right is limited by the act of 1890 to six months' rent due before adjudication, the remainder of his claim ranking for dividend with the claims of other creditors. Various gas and water companies have also statutory powers of distraint under special acts, but the policy of recent legislation has been to discourage any extension of such privileges. Where the bankrupt holds an office of trust in any savings bank or friendly society, any balance in his hands due to such bank or society has been held under the acts relating to these bodies to be payable in preference to any other claim against the estate. Other preferential claims are regulated by the Bankruptcy Acts and by the Preferential Payments in Bankruptcy Act of 1888, and include taxes, parochial and other local rates for not more than one year, wages and salaries for four months, but not exceeding £50 (limited in the case of ordinary labourers and workmen to two months' wages not exceeding £25), and agricultural labourers' claims not exceeding one year's wages, if hired by special contract for payment of a lump sum at the end of a year. These claims are entitled to preference not only over funds in the hands of the trustee, but also over the proceeds of any distraint levied by the landlord within the three months prior to the receiving order, the latter in that case becoming a preferred creditor for the amount so paid. Articled clerks and apprentices may also be allowed repayment of a proportion of the premium on their unexpired agreements. On the other hand, usual trade discounts (exceeding 5%) must be deducted from traders' proofs, and the following claims are postponed until the general creditors are paid in full, viz. claims by a married woman for loans to the husband for the purposes of his business, claims for loans advanced to any person in business at a rate of interest varying with the profits, and claims for interest in excess of 5% per annum. Subject to these exceptions all debts proved in the bankruptcy must be paid pari passu. Any surplus after payment of 20s. in the pound and interest at the rate of 4% per annum, from the date of the receiving order, is payable to the bankrupt.

Proofs of Debt.—All claims and liabilities present or future, certain or contingent, arising out of obligations incurred before the date of the receiving order are provable in the bankruptcy, an estimate of the liability in the case of contingent debts being made by the trustee subject to appeal to the court. But demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable. A secured creditor if he proves must either surrender his security, or value the security and prove for the balance; and the trustee can thereupon, subject to the creditor's power in certain circumstances to amend the valuation, take over the security by paying the amount of the valuation, or may require it to be realized. He may be required by the creditor to elect which of these courses he will adopt, failing which the equity of redemption will vest in the creditor. For further regulations as to proofs, the time within which they must be lodged for voting and for dividend, and the manner of dealing with them, reference should be made to the first and second schedules of the act of 1883 and the rules relating thereto.

Dividends.—After payment of costs of administration and preferential debts, it is the duty of the trustee to distribute the estate with all convenient speed,—the first dividend within four months after the first meeting of creditors, and subsequent dividends at intervals of not more than six months, but the declaration may be postponed for sufficient reason by the committee of inspection. Notice of the intention to declare a dividend is gazetted and sent to each creditor mentioned in the bankrupt's statement of affairs who has not proved. The notice should state the last day for proving in order to participate in the distribution, and should be given not more than two months before the declaration. When the dividend is declared, notice of the amount due, and of the place where the same is payable, is sent to each creditor who has proved, with a statement showing particulars of the estate. And provision must be made for creditors at a distance, who have not had time to prove, for disputed claims, and for debts the subject of claims not