Bankruptcy is the legal status of an individual against whom an adjudication order has been made by the court primarily because of his inability to meet his financial liabilities. Adjudication Order in Bankruptcy is a judicial declaration that the debtor is insolvent and it has the effect of imposing certain disabilities upon him and of divesting him of his property for the benefit of his creditors.
Bankruptcy must be distinguished from insolvency which may be defined as the inability of a debtor to pay his debts as and when they fall due. Whether or not a person is insolvent is purely a question of fact thus a person can be insolvent without being bankrupt but he cannot be bankrupt without being insolvent.
OBJECTS OF BANKRUPTCY LAWS
Three main objects of Bankruptcy Laws within the common law jurisdiction have been identified as follows:
1. To secure an equitable distribution of the property of the debtor among his creditors according to their respective rights against him;
2. To relieve the debtor of his liability to his creditors and to enable him to make a fresh start in life free from the burden of his debts and obligations;
3. To protect the interests of the creditors and the public by providing for the investigation of the conduct of the debtor in his affairs and for the imposition of punishment where there has been fraud or other misconduct on his part.
Professor Fridman in his book Bankruptcy Law and Practice has given some reasons for the growth of Bankruptcy. He says that “the alleviation of the plight of the debtor by a more merciful though rigorous provision of Bankruptcy Law has several causes
(a) The rise in importance of trading on credit and the need to encourage such trading for commercial purposes thus increasing chances for financial embarrassment for traders which would make trading more difficult if the harshness of the older law of debt still remained in force;
(b) The change in outlook of society towards those who fail to pay their debts from regarding them as criminals to looking at them only as unfortunate;
(c) The need to protect creditors by giving them some relief though not as great as they are justly entitled to expect rather than punishing the debtor;
(d) The benefit to the community as a whole in that:
(i) The creditors should get something rather than lose all if the debtor could escape with the assets he has or is imprisoned so as to be unable to obtain any assets in the future and
(ii) In that an opportunity is afforded to the debtor to make a fresh start.
Professor Fridman thus asserts that the modern law of bankruptcy is a compromise which is intended to benefit all the parties.
UNDERLINED PRINCIPLES (BASIC PRINCIPLES)
1. The Debtor must surrender all his properties to the creditors;
2. After payment of a percentage of his liabilities, the debtor may obtain a full discharge from his past debt;
3. The creditors may grant a debtor a discharge even where the debtor pays them less than what is prescribed by the law;
4. The court is the arbitrator in all matters relating to the Bankruptcy;
5. Once discharged, a debtor is freed from his financial obligations and reverts to his former status in society.