Bankruptcy law in England was once quite harsh. Bankruptcy was considered a crime and people who could not pay their debts were thrown into debtors’ prison or had their ears cut off. In fact, the first legislation dealing with bankruptcy in England was the Statute of the Bankrupts in 1542. One purpose of this law was to prevent people who owed money from escaping England. Only creditors could commence a bankruptcy proceeding. This law aided in the collection of debts and did not provide relief to debtors.
The Statute of the Bankrupts did not discharge one’s unpaid debts. The concept of a discharge in bankruptcy was not introduced until 1705 with the passage of the Statute of Anne. That law allowed for the discharge of debt so long as one cooperated with the creditors in the bankruptcy. However, the Statute of Anne allowed for the death penalty for fraudulent bankruptcies.
Changes in the laws dealing with corporations would have a profound effect on bankruptcy in England. Before 1844, companies could not be created without a royal charter in England. Also, if corporations went broke then creditors could sue the shareholders to pay of the company’s debts. By 1856, shareholders’ liability was limited to the amount of stock they owned in a particular company (you could lose the stock but not be sued), and royal charters were no longer required to set up companies. These new laws were consolidated in the Joint Stock Companies Act of 1856 and established the modern law of corporate insolvency. Under the new system, a company could go bankrupt and there would be no one creditors could collect from. This was a dramatic shift away from viewing bankruptcy as a criminal proceeding. However, this form of insolvency was limited to traders (merchants).
In 1869, England passed laws allowing all people to file for bankruptcy and significantly limiting the ability of creditors to have debtors thrown in prison. For the first time in England’s history, bankruptcy afforded relief from creditors as opposed to being a remedy for creditors.
