But the appointment of trustees under these acts, instead of being the spontaneous act of the creditors, was frequently due to touting on the part of such agents themselves, or to individual creditors whose interests were not always identical with those of the general body. According to G. Y. Robson, the author of a standard work on the subject, the arbitrary powers conferred by the act of 1861 "led to great abuses, and in many cases creditors were forced to accept a composition, the approval of which had been obtained by a secret understanding between the debtor and favoured creditors, and not unfrequently by the creation of fictitious debts." These evils were greatly aggravated by the decisions of the court relating to proofs on bills of exchange, under which it was held that the holder of a current bill could prove on the bankrupt estate of an indorser, although the bill was not yet due, and the acceptor was perfectly solvent and able to meet it at maturity. Thus in large mercantile failures, bankers and other holders of first-class bills could prove and vote on the estates of their customers, for whom the bills had been discounted, and thus control the entire proceedings, although they had no ultimate interest in the estate.
But probably the greatest source of the abuses which arose under the act of 1869 was the proxy system established by the act and by the rules which were subsequently made to carry it out. The introduction of proxies was no doubt intended to give absent creditors an opportunity of expressing their opinions upon any question which might arise. But the system was too often used for the purpose of stifling the views of those who took an independent part in the proceedings. The form of proxy prescribed by the rules contained no limitation of the powers of the proxy-holder and no impression of the opinion of the creditor. It simply appointed the person named in it as "my proxy," and these magic words gave the holder power to act in the creditor's name on all questions that might be raised at any time during the bankruptcy. Hence arose a practice of canvassing for proxies, which were readily given under the influence of plausible representations, such as the holding out of the prospect of a large composition, but which, when once obtained, could be used for any purpose whatsoever except the receipt of a dividend. Thus it frequently happened that the entire proceedings were controlled by professional proxy-holders, in whose hands these documents acquired a marketable value.
They were not only used to vote for liquidation by arrangement instead of bankruptcy proceedings, but not infrequently the matter took the form of a bargain between an accountant and a solicitor, under which the former became trustee and the latter the solicitor in the liquidation, without any provision for control over expenditure or for any audit of the accounts. Even where a committee of inspection was appointed to exercise functions of control and audit, they too were often appointed by the proxy-holders, and not infrequently shared in the benefits. On the other hand, where the amount of debts represented by the proxy-holder was insufficient to carry the appointment of a trustee and committee, the votes could be sold to swell the chances of some other candidate. Hence ensued a system of trafficking in these instruments, the cost of which had in the long run to come out of the estate. The result was that undesirable persons were too frequently appointed, whose main object was to extract from the estate as much as possible in the shape of costs of administration. The debtor was practically powerless to prevent this result. If he attempted to do so he sometimes became a target for the exercise of revenge.
His discharge, which under liquidation by arrangement was entirely a matter for the creditors, might be refused indefinitely; and so largely and harshly was this power exercised under the proxy system, especially where it was supposed that the debtor had friends who could be induced to come to his aid, that a special act of parliament was passed in 1887, authorizing the court to deal with cases where, under the act of 1869, a debtor had not been able to obtain a release from his creditors. On the other hand, the complaisant debtor, although he had incurred large obligations in the most reckless manner, often succeeded in stifling investigation and obtaining his release without difficulty as a return for his aid in carrying out the arrangement.
The result of such a system could not be other than a failure. After the act of 1869 had been in operation for ten years, the comptroller in bankruptcy reported that out of 13,000 annual failures in England and Wales, there were only 1000 cases (or about 8%) "to which the more important provisions of the act for preventing abuses by insolvent debtors and professional agents applied; the other 12,000 cases (or 92%) escaping the provisions which refer to the examination and discharge of bankrupts, and to the accounts, charges and conduct of the agents employed." It is not to be supposed that all the cases in the latter class were marked by the abuses which have been here described. In a large number the proceedings were conducted by agents of high character and standing, and with a due regard to the interests of the creditors. But the facilities for fraudulent and collusive arrangements afforded by the act, and the want of effective control over administration, inevitably tended to lower the morale of the latter, and to throw it into the hands of the less scrupulous members of the profession. The demand for reform, therefore, came from all classes of the business community.
No fewer than thirteen bills dealing with the subject were introduced into the House of Commons during the ten years succeeding 1869. At length in 1879 a memorial, which was authoritatively described as "one of the most influential memorials ever presented to any government," was forwarded to the prime minister by a large body of bankers and merchants in the city of London. The matter was then referred to the president of the Board of Trade (Mr Chamberlain), who made exhaustive inquiries, and in 1881 introduced a measure which, with some amendments, finally became law under the title of the Bankruptcy Act 1883.