Bankruptcy

BANKRUPTCY. - By this name (from Lat. fallere = to fail), one denotes the act of him who, unable to satisfy all his debts, makes the cession of his goods, so that provision may be made that the estate, in the manner as just as possible, be applied to the extinction of the debts.

It is evident that the debtor is always bound for himself to the integral payment of his debts, save for remission, set-off or composition. There are, however, causes which, without extinguishing the obligation to restore, authorize a delay in payment. Among these one may list financial insolvency. Ordinarily, such an insolvency is morally culpable, when it is announced without sufficient guarantee of not worsening, by one's own act, the situation of the creditors and without a well-founded hope of recovery, to continue the business, despite the insolvency. And if this should happen, one is responsible for the further damages.

In such circumstances, natural law requires that: a) the legitimate owner recover the things which still exist, without having passed into the ownership of the debtor, as things entrusted, lent, found, stolen, etc.; b) the privileged credittors, such as creditors of mortgages, be satisfied before the others; c) place then be given to the other creditors, among whom, even in partial payment, a certain order must reasonably be preserved, whether of precedence in the debt or in the claim. It is in any case necessary that he place at the disposal of the creditors whatever remains, after deducting what is necessary for an honest maintenance, according to his own station, and the obligation remaining firm to complete the restitution, when he can. He would therefore evidently commit injustice who, unable to satisfy all his creditors, should sell his goods to his children and leave them to his wife. An exception may take place, when the wife herself is truly a creditor.

But in today's legal systems the State wishes to intervene with its laws, indicating the way to be followed or compelling it to be followed with various additions to what would be pure natural law. The epilogue of these precautionary and repressive measures is bankruptcy, that is, the state of insolvency declared by a judgment of a court, from which special effects of a personal and real order follow, and a collective procedure is set in motion culminating in the liquidation of the assets and the distribution of the net proceeds among the creditors.

The ancient legal systems laid a heavy hand on the debtor in such a way as to injure the most fundamental rights of the human person. The debtor was in the first or second line bound with his own person or that of his dependents and reduced to a servile condition. Without entering into the slow historical evolution, as regards the Oriental legal systems it will suffice to refer to the vivid description we have of them in a parable of the Gospel of St. Matthew (18, 32-34), and as regards ancient Roman law, it will suffice to recall the ius noxae dandi. But even in the intermediate law the cessio bonorum was accompanied by such and so many humiliating circumstances as to shatter personal dignity. The debtor, almost naked and barefoot, keeping a single garment, had to sit on a stone in the public square and remain there a whole day, saying: cedo bonis.

In today's legal systems the inalienable rights of the bankrupt are protected with sufficient breadth, but one must keep these precedents in mind in order to understand the language, which may seem excessively accommodating to the debtor, of certain moralists, especially ancient ones.

In Italian law, now collected in Royal Decree no. 267 of 16 March 1942 and in certain articles of the Civil Code (1977-86, 2288, 2308), first of all a temporary suspension of payments may give rise to the procedure of controlled administration with the appointment of a government commissioner. Furthermore, not all entrepreneurs or companies are subject to the legislative provisions concerning bankruptcy; for some, entrepreneurs or bodies, e.g. public bodies, compulsory administrative liquidation is set in motion.

Various paths are then open, before reaching the declaration of bankruptcy; and first of all the concordat.

The concordat may be extrajudicial, and is a kind of transaction between debtor and creditors, who content themselves with the percentage offered to them, or judicial. The latter may be either a preventive concordat or a concordat in bankruptcy.

A preventive concordat is set in motion when the debtor offers serious guarantees of paying, beyond one hundred per cent of the privileged and mortgage credits, at least 40% of the amount of the unsecured credits, within six months from the date of homologation. The preventive concordat may be proposed to the creditors by the entrepreneur himself until his bankruptcy is declared, and it follows a particular procedural course with the admissibility of the proposal, the appointment of the judicial commissioner, the approval of the majority of the creditors according to the proportion of the credits, in a judgment, and the homologation of the same, which then becomes binding on all.

In the context of a preventive concordat or even outside it and in its place, one may also have recourse to the cessio bonorum, introduced by the Civil Code of 1942, which, binding only the adhering creditors and leaving freedom of action to the dissenting ones, deprives the debtor of the availability of his goods, of which, however, he retains ownership, until the liquidation thereof is completed. The law fixes the modalities of the liquidation itself.

Another means to which one may have recourse, before arriving at the judicial declaration of bankruptcy, is the datio in solutum, which differs from the preceding one in that the debtor transfers not only the availability but the ownership of part or all of his goods in favor of one or more creditors, who are then delegated to the extinction of the liabilities.

The epilogue of all this process may be the declaratory judgment of bankruptcy, which, once it has intervened, deprives «ipso iure» the bankrupt, among other things, of the very administration and the availability of the goods existing at the date of the declaration, as well as of active and passive standing in relation to disputes of a patrimonial nature; it also suspends the running of legal and conventional interest. The organs of bankruptcy are the delegated judge, the trustee and the committee of creditors.

Bankruptcy may be closed: by revocation of the declaratory judgment, by distribution and division of the assets or by their non-existence, by lack of a passive mass; by integral payment; by concordat.

The latter is the concordat in bankruptcy and differs as such from the preventive one: it is proposed by the bankrupt, who offers the unsecured creditors a percentage, and is subject, like the other, to the consent of the numerical majority. Once the concordat has been regularly performed, the bankrupt may be granted civil rehabilitation, pronounced by the court by judgment.

In all this bankruptcy process, which involves a series of human actions and brings a quantity of persons into play, it is more than natural that all, from the bankrupt to the trustee, from the creditor to the judge, observe the general and particular norms of morality, acting according to justice and charity both in denouncing the bankruptcy at the opportune time, and in requesting it on the part of the creditors, and in carrying out conscientiously the prescribed procedure without malversations or frauds. To this end, the norms that govern restitution may be kept particularly in mind, and what has been said with regard to deceit or fraud.

But three questions are principally wont to be treated in the moral evaluation of bankruptcy legislation: whether or not these civil laws are binding in conscience; consequently, whether or not it is lawful for the bankrupt to evade any of these positive norms, in order to vindicate possible rights of the natural order; and to what extent the extinction of judicial action against the bankrupt also extinguishes in him the moral obligations toward his creditors.

The answer to the first question is today generally affirmative. The provisions of the laws in question tend to protect the interests of justice, of public trust and of commerce; that is, they tend to safeguard virtues that are not only individual but social, without which the stability of human relations could run serious risks. Their general obligation in conscience is therefore natural, even though in minute particulars eventual dissonances with the natural law are possible. Not to mention that, as regards the contractual part of this legislation, the principle of can. 1529 holds, with the consequent reception of civil law into canon law, save for differences of provisions between the one law and the other and with the natural law.

Now canon law recognizes in this matter for the cleric the privilegium competentiae (can. 122), which, however, present-day bankruptcy laws generally recognize for all citizens, and therefore also for the cleric. Greater difficulties can arise for the penal part of bankruptcy law, although even here Italian law remains very close to the natural law. Among the gravest abuses punished are: a) the crime of fraudulent bankruptcy (law cited, art. 216), that is, the misappropriation of assets or simulation of liabilities, which hardly exist without malice or grave moral fault. b) Simple bankruptcy, prosecuted in Italian law as a crime (law cited, art. 217) and which exists juridically when the bankrupt has made excessive expenditures, has abandoned himself beyond every measure of prudence to operations of pure chance, has aggravated his own insolvency, without requesting the declaration of his bankruptcy, has not satisfied the obligations assumed by composition or has not kept the prescribed accounting books; ordinarily it too presupposes not only juridical fault but also theological fault. In any case, as long as such negligences and risky imprudences do not give rise to a moral wrong, besides a juridical one, there remains only the obligation to accept their consequences «post sententiam iudicis». c) Other abuses that Italian law punishes, as for example obtaining signatures of favor, the display of nonexistent credits, etc., are likewise ordinarily not only crimes from the juridical point of view but also wrongs in the moral field. In any case the principle set forth above always holds.

Regarding the second question, present-day Italian bankruptcy law, by excluding from the passive mass: goods and strictly personal rights, alimony payments, salaries, pensions and wages, within the limits of what is necessary for the maintenance of the bankrupt and his family, or by having given the delegated judge the power to grant the bankrupt a subsidy by way of alimony, while further preserving the bankrupt's right to reside in the house of his property, has rendered almost superfluous many questions that used to be raised about the «quantum» the bankrupt could secretly retain, by way of honest substitution, according to his condition.

More arduous is the question whether the bankruptcy procedure entirely extinguishes, even in conscience, the obligations of the bankrupt toward his creditors. For there is never agreement in the solutions given by authors.

Some, who hold themselves more closely to the historical solutions and to arguments from authority, deny that by the observance of juridical provisions alone the bankrupt can consider himself exempted from any future obligation, unless this is expressly recognized for him (P. Laymann, M. Diana, Roncaglia, Scavini, G. Buceroni).

Others, however, admit it, albeit with some hesitation, basing themselves on a supposed common persuasion, which they hold to have collapsed with the extinction of judicial action in the various provisions of bankruptcy law, of any further obligation (A. Lehmkuhl, E. Génicot, J. Salmann).

Yet others, such as Vermeersch, would wish, and perhaps with more foundation, that the moral judgment be brought to bear on individual bankruptcy laws. Thus, embracing this thesis, modern authors speak of every extinction of obligation, even of the moral order, in the English legal system (Crolly, Slater), in that of the U.S.A. (Bankruptcy Act, 1 July 1898 with subsequent amendments, Martin), and in Dutch law (Duynstev). The same could not be said in Italy, in view of arts. 1984 and 1230, para. 2 of the Civil Code, where there is talk of novations. In the first it is said: «If there is no contrary agreement, the debtor is released toward the creditors only from the day on which they receive the part due to them from the proceeds of the liquidation, and within the limits of what they have received»; in the other, moreover: «The will to extinguish the preceding obligation must appear in an unequivocal manner». Now nowhere does the will of the Italian legislator appear to extinguish with bankruptcy provisions the preceding natural obligations. The same can be said of the legal systems in this matter of various other nations: France, Germany, Belgium, Spain, etc. (cf. A. Vermeersch, Theol. mor., 3rd ed., Rome 1937, n. 467, p. 477).

A special problem of the moral, social and political order is presented by the bankruptcy of States and similar measures, of monetary devaluation, for which v. SVALUTAZIONE MONETARIA.

Pietro Palazzini