Joint Committee on Legislation debate -
Friday, 29 Mar 1985

SECTION 43.

Question proposed: "That section 43 stand part of the Bill."

Deputy Noonan (Limerick East)

This is a new section. There are no statutory provisions relating to second or subsequent bankruptcies in Irish legislation, nor are there any provisions requiring a bankrupt who obtains credit to disclose his bankruptcy. Under the existing practice, on a second adjudication, the Official Assignee intervenes (by way of letters, addressed to the bankrupt and to the solicitor for the petitioning creditor), claiming the assets in the second bankruptcy, as after acquired property in the first bankruptcy for the benefit of the creditors in the first bankruptcy. This practice was regarded as unfair to creditors of the second bankruptcy. Section 43 alters the law governing second bankruptcies and makes it statutory. It implements the committee's view that creditors in a second or subsequent bankrutpcy should have priority over the creditors in the prior bankruptcy in respect of all property acquired by the bankrupt subsequent to his prior adjudication.

The committee reached this decision because, firstly, they proposed to make a bankrupt guilty of an offence if he obtained credit without disclosing his bankruptcy, (section 124 (a). It would be unlikely that a bankrupt in future would be able to obtain a large amount of credit. Secondly, they considered that since second bankruptcies tended to occur long after the first, the assets of the second bankruptcy are fresh assets and in no way connected with the first. Therefore the creditors of the second bankruptcy should have prior claim on them rather than the creditors of the first bankruptcy.

Deputy Taylor

I must admit this whole concept of a second bankruptcy comes somewhat of a surprise to me. I see it as a suggested new innovation. The effect of it would be that a person who is bankrupt, whose various affairs go on at a later date and he is adjudicated bankrupt for the second time, is bankrupt twice over. I find the whole concept of it rather strange. Take the case of a man who is adjudicated bankrupt. Let us say after he is bankrupt he acquires, through one way or another, a substantial asset — he is left a substantial sum of money in a will or is awarded damages in an accident case or something like that — and through some sort of reason a substantial asset vests in him. Am I wrong in thinking that that then would also vest in the Official Assignee, that it becomes part of his bankruptcy or does he hold that? Does the whole situation freeze at the date of the first adjudication and only his assets and liabilities at that point are dealt with in the course of that bankruptcy and administered pro rata eventually when his discharge point is reached? Then if he comes to be adjudicated bankrupt the second time, do you have to distinguish, from a time point of view, his asset liability position, between the first date and the second date? I wonder would this lead to incredible complexity and incredible complications, the whole bankruptcy procedure is so complex as it is. In regard to having a second bankruptcy at a later date on top of the first, has there ever really been a need for that? Does that procedure apply in any other country I wonder?

Deputy Noonan (Limerick East)

It is only new to the extent that it is a new statutory provision. It is not that we are introducing a new practice or anything like that. It is not new law except in regard to its being put into a statute. It is certainly common to other bankruptcy legislations. It is in the English bankruptcy legislation. In answer to Deputy Taylor's question, the present legal position provides for second and subsequent bankruptcies and as the Committee pointed out in its report, in Chapter 57, there was a certain amount of disquiet about how the law operated here. The way a second bankruptcy could arise would be, with regard to after acquired property which had not been claimed by the Official Assignee for the benefit of the first bankruptcy, or say the bankrupt was allowed to continue in his official position and retain certain amounts of money. He is not totally denuded of all his means of livelihood. If in those situations he incurs a debt which results in a second adjudication, the present legal position is that all the assets in the second bankruptcy, whatever they consist of, vest in the Official Assignee also. They vest for the benefit of the creditors of the first bankruptcy. The committee regarded this as inequitable. Therefore, they provided as outlined in section 43. It is quite conceivable that a person could be adjudicated a second, third or a fourth time, although I doubt very much if it would happen. The committee's desire was that the assets of the second bankruptcy, on the basis of the reasons already given, should really be used for the benefit of the second group of creditors. If there was any surplus arising on the subsequent bankrutpcy they would revert back. The peculiarity about Irish law as distinct from English law is that you have the same trustee in both cases, the Official Assignee. He would be actually administering two bankruptcies. That is generally the reasoning behind making statutory the provision for a subsequent bankruptcy and changing the legal consequences.

Deputy Shatter

Could I just pursue that a little further? Someone who is a bankrupt, who acquires assets has some form of obligation, after being declared bankrupt, to disclose the nature of the assets acquired to the Official Assignee?

Deputy Noonan (Limerick East)

Yes, under this Bill there is a statutory obligation to disclose after acquired property but that does not necessarily follow that a second bankruptcy could not occur. Take the situation where the person is adjudicated but continues in his employment or any situation where he could incur new debts. When we come to section 44 we will be dealing in detail with what property vests in the Official Assignee. There is a special provision in it which covers after acquired property.

Deputy Shatter

I think the Bankruptcy Committee in their report were concerned about injustice to the creditors in the second bankruptcy. Is there not another argument though, if this operated in the way the Bill is now setting out, the way the Bankruptcy Committee recommended, you could have a situation where there is a second bankruptcy where the creditors of the second babkruptcy end up being fully recompensed but the creditors of the first bankruptcy who waited around for years are still left in a situation where they do not get their money? Does that not create an injustice to the first group of creditors? I see the committee's recommendations as trying to deal with the problem of the second group of creditors, but there is a presumption here that there is a gap of many years and there is a presumption that because it is a criminal offence it is less likely to happen the second time if you get credit above the specified amount. Are you not replacing one injustice by another injustice? The people who become creditors at a much later stage might get paid quicker than creditors from an original act of bankruptcy, going back a number of years, who through no fault of their own but possibly through the failure of the bankrupt to disclose his new assets. They could come into the situation and find they are not going to be paid but later creditors are, who would have arguably, when given credit, had the facility available to them to check the creditworthiness of the bankrupt and to discover whether he had been adjudicated bankrupt before they gave him any credit at all which was not the facility available to the first group of creditors.

Senator O'Leary

I appreciate the fact that we are trying to balance relative injustices. The reality of the situation is that people do not become bankrupt in quick succession for a second time. They only become bankrupt because the law has been inadequate in discharging people from bankruptcy who have failed to come to a composition with their creditors. Later on we will have an opportunity of considering the automatic discharging of people and there is a date of 1960 referred to under section 85 of this Bill as being a date behind which all undischarged bankrupts will now be discharged. We might consider the question of rolling that forward on a continuing basis when we come to it. It is important that we protect the creditors later on down through the years. I know the bankrupt should not trade in that sort of thing but assuming that human nature being what it is that it will happen, to protect the second is a bit more important than discharging, or than looking after the creditors of the first bankruptcy. Otherwise you are imposing a very strict obligation on anybody who is dealing with somebody to check that the person is not bankrupt previously. You are creating quite considerable difficulties. In addition to that, by section 44 after-acquired property does not automatically vest in the Official Assignee it only vests in the Official Assignee if he claims it. So up to the time the Official Assignee claims the property he may be entitled to claim but he has not claimed it, the property still belongs to the bankrupt. The only way you could continue the previous situation is by insisting that all property would continue to vest automatically in the Official Assignee. One of the problems we have to avoid here in considering this matter is extending the duties of the Official Assignee to such an extent that he would not be able to fulfil the duties. If there is a bankruptcy situation where somebody can pay, say, 20p in the £ or 30p in the £, or whatever it may be, in order to bring it to a conclusion rather than allow a situation where the Official Assignee is dealing with the same bankrupt's property over 20 years in trying to manage the estate and the subsequent acquired property, a tremendous strain will be put on the Official Assignee in my opinion. Therefore, we should clear up the first bankruptcy fairly quickly.

One of the effects of this section is to remove the incentive for continuing the bankruptcy for too long. Effectively, what you are saying is that if there is a second accident it is the second person who will benefit from it. In all the circumstance, I agree with the report of the committee. I understand the problems. As Deputy Shatter said, one is trying to balance two unfortunate situations, but I support the section as drafted.

Deputy Noonan (Limerick East)

It is in line with the committee's recommendations. Certain considerations weighed on them when they made their recommendations. First of all, they proposed to make a bankrupt guilty of an offence if he obtained credit without disclosing his bankruptcy, which would bring about a new situation. Secondly, they held a very strong view that in practice a second bankruptcy seems to happen a long time after a first bankruptcy. They went along with this view. The new discharge procedure should be helpful, as Senator O'Leary pointed out.

In section 43(3) there is a saver. Any surplus arising on the subsequent bankruptcy should be transferred to the credit of the former bankruptcy which in terms of balancing the injustices will bring it back to the previous creditors.

Deputy Taylor

My only concern in this is that the creditors of the second bankruptcy have an advantage that the creditors of a first bankruptcy never had in the context of debts incurred. I know this was an argument. On looking at the committee's report it actually referred to this as an argument which was used when views were expressed in England before they changed their laws. It seems if you are giving credit you do have the facility before you give credit to check whether somebody has been adjudicated bankrupt or not. In a sense that is an advantage that the second creditors have over the first creditors. There is a presumption that because it is made an offence now for the bankrupt to incur credit without saying he is bankrupt will prevent it. I do not believe it will. I do not think any bankrupt who will want to look for credit is going to say, "please give me credit but I am a bankrupt." I think that is a lawyer's view, that people behave the way the law says they should behave. It is not a realistic view of the way people operate in the real world. I would not see the penalty imposed in the Act as necessarily acting as a deterrent to someone who is adjudicated bankrupt getting credit without reporting the fact that he is bankrupt. The reality is that if he repeats the fact he is not going to get credit. It is tautological and self-defeating.

Deputy Noonan (Limerick East)

I do not agree. I think the nearer one is to the offence itself — until the second bankruptcy adjudication — the more likely the penalty clause has an effect because the knowledge is reasonably dispersed at that stage if somebody is bankrupt. While it may not have a continuing effect, it will have the effect of increasing the intervals between bankruptcies.

Deputy Shatter, certainly in the context of the view of the committee, we have expressed the view that it is unusual for people to incur bankruptcies in quick succession. Certainly in the course of the last five or six years the possibilities became less unusual. What happens is that creditors do not go to the trouble of getting themselves involved in bankruptcy proceedings. They write off debts. Most lawyers and accountants would be aware of individuals who incurred debts, which merited declarations of bankruptcy and within two or three years moved into another business and found themselves in exactly the same situation. It could be that when the law is updated and operated more efficiently than it has been to date, people may be seen to use the bankruptcy procedure more than in recent years. In a few years time we could find ourselves talking about the injustice to the first group of creditors.

I agree with Senator O'Leary. He raised the matter of two injustices and balancing one against the other. It has been operated one way for 100 years and it is not unfair to try a different method for the next few years.

Deputy Taylor

My own view on this is that it would have been better, in the interest of bringing simplicity into the situation, to abolish the concept of second or subsequent bankruptcies. Apart from anything else, it could leave the Official Assignee in a conflict of interest situation as between the two sets of creditors. It seems to me that when a man is adjudicated bankrupt it is most undesirable to adjudicate him bankrupt a second time. If he is declared bankrupt he is bankrupt. If he has any after acquired assets they are brought into the bankruptcy and in regard to any subsequent bone fide debts that are incurred it would be open to those creditors to participate in that same bankruptcy on a pari passubasis. The idea being that at a point in time he would be discharged from his bankruptcy and the Official Assignee could take all assets that he had available when he would be called in and all debts owed at that particular time, whether before or after, would be dealt with on apari passu basis. It may involve injustice in some way. Whatever you do in this kind of situation involves some injustice. It would certainly have the merit of simplicity about it. When you bring in these concepts of bankruptcy you are reaching into situations so complex that quite frankly with the costs that are involved in unravelling them, and taking into account the situation of one unfortunate Official Assignee trying to cope with it, that quite honestly I think on balance it is probably not worth the ticket. There is much to be said for simplicity in the situation, in so far as it can be achieved.

Deputy Noonan (Limerick East)

There have been second and subsequent bankruptcies in practice which have to be dealt with under existing law. There is a judicial comment quoted in the report on page 361, paragraph 57.2.3. In Re Ryan [1939] Irish Reports 284, Judge Hanna commenting on the right of the Official Assignee in the first bankruptcy said:

"It is unfair to the creditors of the second bankruptcy but in my opinion it is the law in this country."

It was held in that case that the Official Assignee was entitled to property for the benefit of the creditors of the first bankruptcy even though it defeated the creditors of the second bankruptcy. We are not introducing into statute a provision for future possibilities. These things have happened in the past and are dealt with under existing law but we are changing the rules.

Deputy Shatter

Just to take up the point Deputy Taylor was making, we are abandoning one group and favouring the other. It does make some degree of sense and brings some equality to bear on the situation. If there were a second bankruptcy and new assets going into that bankruptcy, both groups of creditors would benefit equally. In other words, the first group of creditors from the first bankruptcy would not, as they would have under the present law, a first right of claim to have their debts discharged. Also, the second group, which is what we are now suggesting, would not have the first right of claim to have all their debts discharged. The new assets would be applied equally to all groups of creditors, which may lead to some form of rearrangement of payment. That would seem to be a middle of the road way of dealing with this problem. Where there are two injustices one would be taking into account the set of circumstances of both groups of creditors. Was that avenue considered? I fully accept that the bankruptcy committee recommended what we are doing in the Bill.

Deputy Noonan (Limerick East)

Again, subsequent to what I quoted in the Bankruptcy Law Committee Report, 1972 under Judicial comment, there is a section headed:

Arguments

57.3.1. Three choices. In all the circumstances it is difficult, in our view, to legislate fairly. There are three possible choices,

(1) to leave things as they are.

(2) to allow creditors in a second bankruptcy sufficient assets to pay a pound in the pound, in other words assets acquired by a bankrupt after his previous bankruptcy should be applied in discharging the debts owing to creditors in the second bankruptcy in priority to any debts remaining outstanding in the prior bankruptcy.

(3) to let the assets of the second bankruptcy go to the second lot of creditors paying the same dividend as the creditors got in the first bankruptcy and after that creditors in each bankruptcy to share and share alike.

The committee then discuss those three options and argue what the situation is, and the view expressed in England and then go on to make the major recommendation that creditors in second and subsequent bankruptcies should have a priority in those bankruptcies. Paragraph 1167 of Sir Kenneth Cork's Report on Insolvency Law in Practice in Britain, page 266, states:

"It is doubtful if any easily workable scheme can be devised which will in every case produce a fair balance between the competing interests of the respective groups of creditors in successive bankruptcies; but we consider that to give priority to the claims of the later creditors against property acquired since the earlier bankruptcy in the manner proposed by the Blagden Committee will usually produce a more equitable result than the present law and we therefore support it."

But to go back to Senator O'Leary's point, one is trying to balance the injustices. Both our bankruptcy committee and the Cork committee argue that in the generality of circumstances it is more equitable to make the change than to leave it as it is. Both make the point that it is doubtful if an easily workable scheme can be devised which in every case will produce a fair balance between the competing interests. Both the Cork committee report and our bankruptcy law committee report says, "In all the circumstances it is difficult, in our view, to legislate fairly." So we are back to a choice situation.

Deputy Shatter

It would seem to me that our own bankruptcy committee at paragraph 57.5.1. were in favour of priority for the second creditors, primarily because of their view "that a bankrupt should be guilty of an offence if he obtains credit of £10 or upwards from any person without informing that person that he is a bankrupt," they then go to say that, "It seems unlikely that a bankrupt in future will be able to obtain a large amount of credit." Being viewed as a criminal offence very much influenced them in their decision that you prefer the second group of creditors. I would prefer solution No. (3) given on page 362, which in a sense is what we were saying a few moments ago, giving each group of creditors equal facility. You still have the criminal offence there as a penalty. Even taking what the Cork report says, there is really no solid legal reason for not being able to do it that way. The psychology of it is that the law has been inequitable to second creditors for so many years, now we should even up the equity on their side. The correct solution would be to bring in new assets and make them equally applicable to debts of both first and second creditors and give neither group a priority in that situation.

I would ask the Minister to look again at that for Report Stage. I am not totally convinced that we are doing this correctly. I am not totally convinced by the Cork report. To coin a phrase of a constituency colleague of mine, I do not think we should necessarily slavishly follow the final solution they produced in England to deal with this legislative problem. There is no real explanation from our own committee as to why we should not take No. (3) on the equal application of funding. They just say it is going to be a criminal offence therefore it is less likely to happen. But on the basis that it will happen in some instances, applying assets to the benefit of both sets of creditors is simply more equitable. If I was waiting for ten years for debts to be paid off and if somebody committed a second act of bankruptcy, and I saw that the second group of creditors had all their debts paid off and I was still left with a few left over morsels, I would feel very angry that people who had been owed money for perhaps only one or two years were fully paid. I would ask the Minister to look at this on Report Stage.

Chairman

We have probably covered all of the points. Perhaps the Minister will look again at this.

Senator O'Leary

I think it is a very good principle that we should follow Cork on all possible occasions.

Deputy Noonan (Limerick East)

Even on the Cork 800. There is just one final point. Section 43 deals only with a second bankruptcy within the terms of the section itself. Taking the Bankruptcy Bill as a whole, the whole thrust of the Bill is to expedite bankruptcies. It is not anticipated that you will have first bankruptcies that are six, seven, ten or twelve years old. While we considered the recommendations of the committee and the alternatives put forward, we reached the same conclusion as the Committee, primarily because in section 43, one is dealing only with after-acquired property which has not been claimed by the Official Assignee and not distributed. If from the first bankruptcy the after-acquired property is claimed, it will have vested and if it is distributed and the adjudication goes ahead as quickly as is expected, one is giving priority only in relation to what is left of the after-acquired property. To that extent it was felt that the bankruptcy law committee's recommendation was tenable although it was not necessarily based on the reasons they gave for adopting it.

Deputy Shatter

Property acquired later and not taken up by the Official Assignee may not be known to exist by the Official Assignee, it may only come to light on the second bankruptcy. That is the problem. If the Official Assignee had made a conscious decision — I am not going to bring X acquired property after the event into the first bankruptcy — in justice the second group of creditors should benefit. The practical reality of life is that the Official Assignee may not know of the existence of other assets until a second bankruptcy occurs and additional information is revealed. In a sense, the second group of creditors are benefiting from a concealment on the part of the bankrupt which in effect defrauded the first group of creditors over a period of years. There are arguments on both sides.

Question put and agreed to.