The Law of Bankruptcy: A Historical View
The law of bankruptcy is the legal framework governing the procedures taken when individuals or companies default on the settlement of their debts. It seeks to strike a balance between protecting the rights of creditors and affording the debtor an opportunity to reorder their financial affairs. Through it, the lawful means are fixed for liquidating a debtor's assets or restructuring their debts, so that economic justice is served.
What bankruptcy is
Bankruptcy is a legal state declared when an individual or a company is unable to meet its financial obligations toward creditors. The law of bankruptcy is an essential part of commercial and economic legislation, and seeks to strike a balance between the rights of the different parties:
- The rights of creditors: recovering what is owed to them so far as possible.
- Protection of the debtor: affording an opportunity to reorder their financial affairs without exhausting their resources entirely.
The legislative history of bankruptcy
The development of bankruptcy legislation may be divided into several principal stages:
- Antiquity
In Roman law: bankruptcy was treated as a disgrace and a social stain, and its declaration was often followed by harsh penalties — the enslavement of the debtor, or in extreme cases the division of their body among the creditors. Later, amendments appeared allowing creditors to seize only the debtor's assets in settlement of the debts.
In Islamic jurisprudence: Islamic law treated bankruptcy as an economic condition to be met with mercy and justice. The Qur'anic text and the Sunna both insist on granting the insolvent debtor time to pay: "And if someone is in hardship, then let there be postponement until a time of ease" (al-Baqara: 280). Islam forbids exhausting the debtor or burdening them beyond their capacity, and encourages settlement and forbearance in the handling of debts.
- The Middle Ages
As trade flourished, the ordering of debt and bankruptcy became vital. In Europe bankruptcy was still treated as a crime, and creditors were permitted to imprison the debtor until payment was made. In the Arab and Islamic lands, the institution of the hisba was employed to settle commercial disputes, bankruptcy among them, while securing the rights of both parties.
- The modern age
The rise of dedicated bankruptcy regimes: with the economic and social advances of the eighteenth and nineteenth centuries, states began to develop ordered bankruptcy laws, with an eye to protecting investment and regulating trade.
In France, the French Bankruptcy Code of 1807 introduced new notions such as reorganisation as an alternative to complete liquidation.
In the United States, the first comprehensive bankruptcy act was passed in 1800, and was later developed into the federal bankruptcy law.
The characteristics of modern bankruptcy regimes:
- Reorganisation: providing the debtor with means of continuing in business while settling the debts by degrees.
- Liquidation: selling the debtor's assets and distributing the proceeds among the creditors.
- Voluntary and involuntary bankruptcy:
Voluntary: bankruptcy sought by the debtor.
Involuntary: bankruptcy sought by the creditors against the debtor.
— Protection of the debtor: the declaration of bankruptcy prevents the debtor from being wholly exhausted, some legislations providing a minimum for subsistence.
Modern legislation in the Arab states
Saudi Arabia: the Bankruptcy Law was issued by Royal Decree M/50 of 1439 AH (2018), with the aim of strengthening the business environment and protecting the rights of the various parties.
The law provides mechanisms such as:
Financial reorganisation: enabling the debtor to order their affairs with the creditors.
Liquidation: selling the debtor's assets for distribution among the creditors.
Protective settlement: settling debts before full bankruptcy is reached.
The United Arab Emirates: the federal bankruptcy law was issued in 2016 (Federal Law No. 9), providing a modern frame for bankruptcy in the case of companies and individuals, and covering:
Restructuring procedures.
Protection of debtors from legal claims during a settlement.
Penalties for fraudulent bankruptcy.
Egypt: the provisions on bankruptcy are contained in the Egyptian Commercial Code (Law No. 17 of 1999), with later amendments strengthening the restructuring procedures.
Recent tendencies in bankruptcy law
- A turn toward restructuring: rather than complete liquidation, the emphasis falls on rescheduling debts so that economic activity may continue.
- Strengthening transparency and accountability: establishing courts specialised in bankruptcy matters, so as to avoid delay or manipulation.
- Drawing on technology: using digital systems to speed the handling of claims and to provide a platform for creditors and debtors.
What the law of bankruptcy seeks
- To serve justice: holding the balance between the rights of creditors and the protection of the debtor from exploitation.
- To strengthen the economy: encouraging investment by providing a clear legal environment for handling financial distress.
- To limit corruption: through strict penalties for fraudulent bankruptcy.
Bankruptcy laws differ in their detail from state to state, but they share the same governing principles.
Bankruptcy is regarded today as an instrument of financial recovery rather than as a punishment, and modern laws afford greater flexibility in handling it, which supports economic growth and investment.
The law of bankruptcy reflects the development of societies and the maturity of their legal and economic orders, seeking as it does to strike a balance between social justice and economic stability.