Creditors, Debtors, and the Search for Balance

The tension between the interests of creditors and debtors is a tale as old as time. Modern bankruptcy law aims to balance these interests by providing for the equitable distribution of a bankrupt’s estate among unsecured creditors while also providing for the financial rehabilitation of a bankrupt individual.¹ Creditors’ interests are served by the single proceeding, which prevents a “free for all” where each creditor races to enforce its claim at the expense of others.² Debtors’ interests are served by their discharge from bankruptcy, upon which they are released from all creditor claims that existed at the time of bankruptcy (with some exceptions).

Today, most professionals understand the importance of serving the interests of both creditors and debtors. More significantly, modern bankruptcy law recognizes that protecting debtors’ interests is a benefit for everyone.  By providing “honest but unfortunate debtors” with a “fresh start” upon discharge from bankruptcy, the debtor can reintegrate into economic life and become a productive member of society.³ However, the history of bankruptcy law is much less forgiving.

Throughout history, the inability to pay one’s debts as they came due was not only considered dishonourable but often came with harsh consequences. In Ancient Rome, for example, debtors could be enslaved or killed for defaulting on their financial obligations. In the second century BCE, an early form of bankruptcy emerged called “venditio bonorum”. Creditors could petition a praetor (magistrate) for an order granting them possession of all a debtor’s assets to prevent dissipation. Next, there would be a public proclamation to all the debtor’s creditors, followed by a meeting of those creditors to elect a “magister bonorum” who would supervise the public auction of the debtor’s estate.

While this process served creditors’ interests, it had a devastating impact on the debtor. The debtor would suffer a social and political “death” known as “infamia”. In fact, Cicero, the great lawyer and statesman, likened an insolvent debtor witnessing the auction of their estate as witnessing their own funeral.⁴ Moreover, unlike modern bankruptcy, the debtor would not be granted a discharge, and remained subject to execution and arrest for any unpaid portion of his debts.

Fast forward several centuries, and there was still very little consideration for the interests of debtors. In England, debtors’ prisons were common from the 13th to 19th centuries. The idea was often that the debtor’s friends and family would repay the debts to secure the debtor’s release.⁵ This was a flawed theory. Insolvent debtors could not earn money to repay their debts while incarcerated, and they often continued to accumulate. A “fresh start” was simply not available.

Bankruptcy law was not introduced into England until the mid-16th century, and even then, it faced significant opposition from creditors who preferred their debtors imprisoned.⁶ Further, the concept of a discharge from bankruptcy was not introduced until the 18th century, largely as a hardship measure for relieving the thousands of debtors locked in overcrowded prisons.⁷

Imprisonment for debt was less common in France.⁸ For this reason, together with a lack of prison infrastructure, imprisonment was not used as a means of debt recovery in New France (Quebec) until it was introduced following British conquest and the Royal Proclamation of 1764.⁹ In Quebec, however, the law evolved such that, unlike in England, imprisonment could only take place after the debtor’s personal and real property was seized, sold, and found insufficient.¹⁰

Following confederation, Canadian bankruptcy laws were similarly focused on serving the interests of creditors. Parliament first enacted the Insolvent Act of 1869, followed by the (even more) creditor-friendly Insolvent Act of 1875. Under the latter statute, debtors were only granted a discharge if the requisite number of creditors consented to it.¹¹ There was very little interest in granting debtors a “fresh start”, which was perceived as an unacceptable interference with the higher obligation to repay one’s debts.¹² The statute was repealed merely five years later, and Canada was without any bankruptcy legislation for 40 years.

During the First World War, there was a renewed push for bankruptcy legislation, which resulted in the enactment of the Bankruptcy Act in 1919. By this time, attitudes had changed, and the concept of a debtor’s discharge was seen as favourable to creditors, who had become frustrated in their attempts to enforce judgments against rogue debtors. Creditors came to realize that a court-supervised discharge regime was preferable to attempting to enforce their debts individually.¹³ It wasn’t until much later, however, that the concept of debtor rehabilitation, and the “fresh start” principle, came to be a guiding principle of bankruptcy law.¹⁴

The evolution of bankruptcy law reflects a fundamental shift in how society understands insolvency. Modern bankruptcy law recognizes that the interests of creditors and debtors are not always at odds. Bankruptcy law is a matter of economic policy. It provides security and predictability in lending transactions, which influences credit market risk, which in turn affects the cost and availability of credit for Canadians.¹⁵ The overarching policy of bankruptcy law is to minimize the impact of a debtor’s inability to meet their financial obligations as they come due. After centuries of evolution, modern bankruptcy law reflects a simple but important lesson: the strength of the system lies in the search for balance.

1. Alberta (AG) v. Moloney, 2015 SCC 51 at paras. 29 & 90 [Moloney]
2. Roderick J Wood, Bankruptcy & Insolvency Law, 1st ed (Toronto: Irwin Law, 2009) at 3.
3. Moloney, at para. 36.
4. Lisa Eberle, “Debt, Death and Destruction in Ancient Rome” in John Weisweiler, Ancient Mediterranean and Near East: Credit, Money, and Social Obligation (New York: Oxford University Press, 2023) 67 at 67.
5. Andy Wood, “In debt and incarcerated: the tyranny of debtors’ prisons” The Gazette (UK), online
6. Walter Pakter, “The origins of bankruptcy in medieval canon and Roman law” in Peter Lineham, ed, Proceedings of the Seventh International Congress of Medieval Canon Law, (Vatican City: Bibliotheca Apostolica, 1988) 487 at 487 [Pakter].
7. Pakter, at 487.
8. Evelyn Kolish, “Imprisonment for Debt in Lower Canada, 1791–1840” (1987) 32:3 McGill LJ 602 at 604 [Kolish].
9. Kolish, at 605.
10. Kolish, at 607.
11. Thomas G.W. Telfer & Alfonso Nocilla, “One Hundred Years of Canadian Bankruptcy and Insolvency Law: The Origins of the Bankruptcy Act of 1919”, Canadian Association of Insolvency and Restructuring Professionals: Rebuilding Success 21:1 (Spring/Summer 2021) at 32 [Telfer & Nocilla].
12. Telfer & Nocilla, at 32.
13. Telfer & Nocilla, at 33.
14. Telfer & Nocilla, at 33.
15. Industry Canada, Statutory Review of the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act (Ottawa: Industry Canada, 2014) at 5.