FALLIMENTO. — By this name (from Lat. fallere = to fail), one denotes the act of a person who, being unable to satisfy all his debts, assigns his assets so that the estate may, in the fairest manner possible, be devoted to extinguishing the debts.
It is evident that the debtor is always, in his own right, bound to the full payment of his debts, except in the case of remission, set-off, or composition. There are, however, causes which, without extinguishing the obligation to repay, authorize a delay in payment. Among these may be listed financial insolvency. Ordinarily, such insolvency is morally culpable when it is announced without sufficient assurance that one will not worsen the situation of the creditors through one’s own actions and when, without a well-founded hope of recovery, one continues trading despite the insolvency. And if this should occur, one is responsible for the further damages.
In such circumstances, natural law requires that: a) the legitimate owner recover those things that still exist and have not passed into the debtor’s ownership, such as things entrusted, lent, found, stolen, etc.; b) preferential creditors, such as mortgage creditors, be satisfied before the others; c) the other creditors then be dealt with, among whom, even in the event of partial payment, a certain order should reasonably be preserved, whether according to priority of the debt or of the claim. In any event, it is necessary that he place at the creditors’ disposal whatever remains, after deducting what is necessary for an honest maintenance according to his station, while the obligation to complete repayment when he is able remains in force. He would therefore clearly commit an injustice who, being unable to satisfy all his creditors, sold his assets to his children and transferred them to his wife. An exception may arise when the wife herself is genuinely a creditor.
But in the legal systems of the present day the State seeks to intervene through its laws, indicating the path to be followed or compelling adherence to it, with various additions to what would be pure natural law. The outcome of these precautionary and repressive measures is f., that is, a state of insolvency declared by a court judgment, from which special personal and real effects follow, and proceedings involving all the creditors are instituted, culminating in the liquidation of the assets and the distribution of the net proceeds among the creditors.
Ancient laws dealt harshly with the debtor, in a manner that injured the most fundamental rights of the human person. The debtor was held, in the first or second degree, through his own person or that of his family, and reduced to a servile condition. Without entering into the slow historical development, as regards Eastern laws it will suffice to refer to the vivid description found in a parable of the Gospel of s. Matteo (18, 32-34); and as regards ancient Roman law, it will suffice to recall the ius noxae dandi. But even in intermediate law the cessio bonorum was accompanied by so many humiliating circumstances that it infringed personal dignity. The debtor, almost naked and barefoot, retaining only one garment, had to sit upon a stone in the public square and remain there for an entire day, saying: cedo bonis.
In modern laws, the inalienable rights of the bankrupt are protected with sufficient breadth, but these precedents must be kept in mind in order to understand the language, which may seem excessively accommodating toward the debtor, of certain moralists, especially those of earlier times.
In Italian law, now contained in Royal Decree no. 267 of 16 March 1942 and in certain articles of the Civil Code (1977–86, 2288, 2308), a temporary suspension of payments may first give rise to proceedings for controlled administration, with the appointment of a government commissioner. Moreover, not all entrepreneurs or companies are subject to the legislative provisions concerning f.; for certain entrepreneurs or entities, such as public bodies, compulsory administrative liquidation is instituted.
Various avenues are also open before reaching a declaration of f.; first and foremost, the composition.
The composition may be extrajudicial, and is a form of settlement between the debtor and the creditors, who accept the percentage offered to them, or judicial. The latter may be either a preventive composition or a composition in f.
A preventive composition is instituted when the debtor offers serious guarantees of paying, in addition to one hundred per cent of the preferential and mortgage claims, at least 40% of the amount of the unsecured claims within six months of the date of approval. The preventive composition may be proposed to the creditors by the entrepreneur himself until his f. has been declared, and follows a particular procedural course involving the admissibility of the proposal, the appointment of a judicial commissioner, approval by the majority of the creditors according to the proportion of their claims, judgment, and approval thereof, after which it becomes binding on all.
In the context of a preventive composition, or even outside it and in place of it, recourse may also be had to the casio bonarosa, introduced by the Civil Code of 1942. This binds only the assenting creditors and leaves the dissenters free to act, while depriving the debtor of control over his assets, of which he nevertheless retains ownership until their liquidation has been completed. The law establishes the procedures for the liquidation itself.
Another means to which recourse may be had before reaching a judicial declaration of f. is the dotio in solutum, which differs from the preceding measure in that the debtor transfers not only control but also ownership of part or all of his assets for the benefit of one or more creditors, who are then entrusted with extinguishing the liabilities.
The outcome of this entire process may be the declaratory judgment of f., which, once issued, «ippo iure» deprives the bankrupt, among other things, of the administration and control of the assets existing on the date of the declaration, as well as of active and passive standing in disputes of a patrimonial nature; it also suspends the accrual of statutory and contractual interest. The organs of f. are the delegated judge, the receiver, and the creditors’ committee.
F. may be closed: by revocation of the declaratory judgment; by the division and distribution of the assets, or because they do not exist, owing to the absence of a body of liabilities; by full payment; or by composition.
The latter is the composition in f. and, as such, differs from the preventive composition: it is proposed by the bankrupt, who offers the unsecured creditors a percentage, and, like the other, is subject to the consent of the numerical majority. Once the composition has been duly fulfilled, the bankrupt may be granted civil rehabilitation, pronounced by the court in a judgment.
Throughout this bankruptcy process, which entails a series of human actions and brings a large number of persons into play, it is more than natural that everyone—from the bankrupt to the receiver, from the creditor to the judge—should observe the general and particular norms of morality, acting according to justice and charity, whether in reporting the f. at the appropriate time, in requesting it on the part of the creditors, or in conscientiously carrying out the prescribed proceedings without misappropriation or fraud. For this purpose, particular attention may be paid to the norms governing restitution and to what has been said concerning deceit or fraud.
But three questions in particular are customarily dealt with 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 assert possible rights of the natural order; and to what extent the extinguishing of legal proceedings 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 safeguard the interests of justice, public trust, and commerce; that is, they tend to protect virtues that are not only individual but also social, without which the stability of human relations could face serious risks. Their general obligation in conscience is therefore natural, although in particular details possible divergences from natural law may occur. Moreover, as regards the contractual part of this legislation, the principle of can. 1529 applies, with the consequent reception of civil law into canon law, except where the provisions of one law differ from those of the other and from natural law.
Now canon law recognizes in this matter the privilegium competentiae for the cleric (can. 122), which, however, contemporary bankruptcy laws generally recognize for all citizens, and therefore also for the cleric. Greater difficulties may arise with regard to the penal part of bankruptcy law, although here too Italian law remains closely aligned with natural law. Among the most serious abuses punished are: a) the offense of fraudulent bankruptcy (law cited, art. 216), that is, the misappropriation of assets or simulation of liabilities, which scarcely exist without deceit or grave moral fault. b) Simple bankruptcy, prosecuted under Italian law as an offense (law cited, art. 217), which legally occurs when the bankrupt has incurred excessive expenses, has abandoned himself beyond all measure of prudence to operations of pure chance, has aggravated his own insolvency without requesting the declaration of his bankruptcy, has failed to satisfy obligations undertaken by composition, or has failed to keep the prescribed accounting books; ordinarily, this too presupposes not only legal but also theological fault. In any event, so long as such negligence and risky imprudence do not give rise to a moral offense in addition to a legal one, there remains only the obligation to accept their consequences «post sententiam iudicis». c) Other abuses punished by Italian law, such as procuring signatures of accommodation, ostentatiously claiming nonexistent credits, etc., are likewise ordinarily not only offenses from a legal point of view, but also illicit acts in the moral sphere. In any event, the principle set forth above always applies.
With regard to the second question, the present Italian bankruptcy law, by excluding from the liabilities: strictly personal property and rights, alimony, salaries, pensions, and wages within the limits necessary for the maintenance of the bankrupt and his family, and by granting the delegated judge the power to allow the bankrupt a subsidy by way of maintenance, while also safeguarding the bankrupt’s right to reside in a house belonging to him, has rendered almost superfluous many questions formerly raised concerning the «quantum» that the bankrupt could secretly retain, by way of honest substitution, according to his condition.
More difficult is the question whether bankruptcy proceedings entirely extinguish, even in conscience, the bankrupt’s obligations toward his creditors. In fact, there has never been agreement among authors regarding the solutions.
Some, adhering more closely to historical solutions and authoritative arguments, deny that, by observing only the juridical provisions, the bankrupt can consider himself exempt from any future obligation, unless this is expressly recognized for him (P. Laymann, M. Diana, Roncaglia, Scavini, G. Buceroni).
Others, however, admit this, albeit with some hesitation, basing themselves on a supposed common conviction that regards every further obligation as having collapsed with the extinguishing of legal proceedings under the various provisions of bankruptcy law (A. Lehmkuhl, E. Génicot, J. Salmann).
Finally, another author, such as Vermeersch, would have the moral judgment applied to individual bankruptcy laws, and perhaps with greater foundation. Thus, embracing this thesis, modern authors speak of the extinguishing of every obligation, including those of a 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 novations are discussed. The former states: «Unless there is an agreement to the contrary, the debtor is released toward the creditors only from the day on which they receive the share due to them from the proceeds of the liquidation, and within the limits of what they have received»; the latter states: «The intention to extinguish the previous obligation must be expressed in an unequivocal manner». Nowhere does the intention of the Italian legislator to extinguish the previous natural obligations through the bankruptcy provisions appear. The same may 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, no. 467, p. 477).
A special problem of a moral, social, and political order is presented by the bankruptcy of States and similar measures involving monetary devaluation, for which V. SVALUTAZIONE MONETARIA.