The Principles of Bankruptcy

The Principles of Bankruptcy

Bankruptcy systems differ from one country to another as a result of the development of this system over time and place, in addition to the differences in the goals that each legislator wants to achieve through organizing this unfortunate economic and business situation. In spite of that, there is still a set of basic principles that control most if not all bankruptcy systems. The importance of recognizing the principles of bankruptcy for businessmen and managers lies in enabling them to draw a picture in their minds of what will face them in the case of exposure to such risk, and in understanding the basics of dealing with others with regard to debt relations. So what are these principles of bankruptcy?

1. STOP THE DEBTOR FROM MANAGING AND DISPOSING OF HER/HIS MONEY
One of the most important foundations on which bankruptcy is based, is the debtor's ceasing to manage and dispose of her/his money, whether in present or future, from the date of the issuance of the judgment declaring her/his bankruptcy, to protect the rights of creditors from her/his actions that may harm them.

2. EQUALITY BETWEEN CREDITORS
Bankruptcy systems have as starting point the principle of equality between creditors. To achieve this, the law prevents them from taking individual measures against the debtor to fulfill their rights, and obligates every creditor who wants to obtain her/his debt to join the creditors' group which is managed by the appointed trustee who is responsible for managing the funds of the debtor and liquidate them, so that the funds are divided among them according to the proportion of each debt. Note however that there are important exceptions to this principle as it only concerns UNSECURED creditors, who compete with each other for a share of the proceeds from the sale of the debtor's property. As for creditors SECURED by for example a real estate mortgage, they have preference in meeting their debts from the mortgages that they preserve.

3. RESPECT FOR RIGHTS ACQUIRED BEFORE DECLARING BANKRUPTCY
All rights of natural and legal persons who have acquired a right over the debtor prior to her/his bankruptcy are respected. In other words, declaring bankruptcy of the debtor should not affect the rights of the person who had a right to her/him before the date of the declaration of bankruptcy, provided that the right holder is in good faith!

4. JUDICIAL AUTHORITY SUPERVISION OF BANKRUPTCY PROCEDURES
A judicial authority has broad rights to decide the fate of the bankrupt debtor's funds and the rights of her/his creditors over them after the debtor is stopped to manage and dispose of them. This is reflected in the role of the bankruptcy court supervising the whole process, and in adjudicating the disputes that arise over it.The bankruptcy court is also entrusted with the task of supervising and controlling the work of the trustee who is a representative of the bankrupt debtor and the creditors' group.

5. SPEED OF PROCEDURES
The bankruptcy system is characterized by speedy procedures to maintain the characteristics of commercial transactions as much as possible. This is observed by recognizing the debts of the creditors directly without the need for prior judicial determination, only that they are proven in front of the bankruptcy court unless there are disputes over them. In addition, usually, the deadlines for appealing to the bankruptcy judgment are shortened.

6. CARING FOR DEBTOR
One of the most important goals of the bankruptcy system is to strengthen confidence in commercial transactions. Therefore, its provisions are strict against the bankrupt debtor, but on the other hand, they tend to take care of her/him if this serves the interest of both creditors and the debtor. Among the aspects of care is assigning alimony for her/him and her/his family; the right to reconcile with creditors whenever she/he is in good faith, and sometimes to allow her/him to continue the business to some extent.

7. CRIMINALIZATION OF BANKRUPTCY
One of the most important principles of modern legislation is the criminalization of bankruptcy when it is accompanied by acts involving default or fraud. In addition, some political and professional rights are forfeited from the bankrupt debtor. The goal is believed to be to push the trader to exercise caution in her/his actions that may harm the rights of creditors, in order to preserve confidence and trust in commercial transactions.

References:
Mitiku Mada and Alemayehu Tilahun (2012), "Principles of Bankruptcy", Abyssinia Law.
Essam Al Tamimi (2020), "Ten Reasons why you should not consider filing for Bankruptcy", Al Tamimi & Company.