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With new bankruptcy and debt advice legislation on the horizon in Scotland, Stephen Cowan, managing partner of Yuill + Kyle, a Scottish firm specialising in debt recovery and credit control, talks about the new provisions coming into force and what they could mean for lawyers and their clients.
The majority of the Bankruptcy and Debt Advice (Scotland) Act 2014 (BDA(S)A 2014) will come into force on 1 April 2015 (via Bankruptcy and Debt Advice (Scotland) Act 2014 (Commencement No 2, Savings and Transitionals) Order 2014 SI2014/216 ).
After that date there will be compulsory money advice for those entering bankruptcy, certain powers relating to bankruptcy will be transferred from the sheriff court to the Accountant in Bankruptcy (AiB) and there will be a freeze on a creditor’s ability to enforce debts while an application for a statutory debt solution is made.
The key changes are that individuals will have to take financial advice prior to going through the ‘self’ bankruptcy route. This is to ensure they are selecting the correct ‘debt relief’ and most suitable vehicle for themselves and their situation. Vulnerable and recurring debtors will have to receive financial education through ‘the financial wealth service’ to try and break the debt cycle—although I have no idea how this will be delivered and how effective it will be. Most likely is that Money Advice Scotland will be tasked with this in close discussion with the AiB.
The mandatory ‘common financial tool’ to assess surplus income should create a consistent and level playing field, and will hopefully assess surplus income available for creditors which otherwise may have meant an increase in dividends in the past. Whether this will be realised will have to be seen, although the increase in the minimum contribution period from 36 to a more sustainable 48 months should be seen as a positive move towards achieving increased creditor return.
The new ‘debtor contribution order’ which replaces the ‘income payment order’ should lead to little change—although the six-month moratorium to assist debtors whose circumstances have changed through issues such as illness or a bereavement are fair, and mirror what happens with the Debt Arrangement Scheme. The requirement for debtors to sign a ‘statement of undertaking’ to comply with the trustees conditions, including payment of contributions, should be seen as a positive one from the creditors’ perspective. The power to delay the debtor’s discharge if this is not signed should also encourage co-operation from the debtor. However the six-week moratorium over all debt solutions during which creditors cannot carry out enforcement will not be welcomed by creditors—but the idea is to give the debtor some breathing space during which period they can take financial advice from the money advice sector.
The removal of the automatic discharge, except in minimum asset cases, will be seen as positive by creditors. However it is likely that the trustee will continue to proceed with the debtor’s discharge within this period unless there has been good reason for not doing so—which will be the case should the debtor fail to co-operate. Overall this should benefit creditors who are concerned that bankruptcy is simply an administrative process in which debtors do not have to face any legal consequences.
I think the changes are largely desirable because many are focussed with the intention of making the processes more transparent, with a secondary desire to ‘hold the debtor to account’. Although creditors will see this as positive, I don’t anticipate there will be any significant increase in dividend payments to them.
There is no reason why the measures should turn out to be impractical, and the Scottish Government, through the AiB will ensure the new BDA(S)A 2014’s operation. The AiB would be unlikely to have promoted these provisions unless they viewed them to be workable. Disadvantages will only really become apparent once BDA(S)A 2014 is in force, and if so, any difficulties with the legislation, much of which will be articulated by statutory instrument, can be amended by an amending instrument. I’m unsure as to whether there will be hidden costs, but if so, I do not anticipate that they will prove to be particularly onerous.
The most significant impact for lawyers will be the inability to enforce during the moratorium—notification of which they will find on the AiB, Register of Insolvencies and Debt Arrangement Scheme (DAS) Register websites. Lawyers will also have to carry out a search before enforcing, but should really already be checking the DAS Register. The provisions could also lead to a more positive result for creditors, and imparting this ‘good news’ to clients may bolster faith in the insolvency process in Scotland by giving the impression that a bankrupt debtor cannot simply ‘get away with it’—diminishing the idea that bankruptcy is simply a ‘debtor’s charter’.
There are lots of grey areas in as much as the devil will be in the detail—a significant amount of which will have to be coloured by statutory instrument. However, unhappy lawyers can approach the AiB at any stage. They are usually receptive to constructive suggestions during any consultation period, or during the time such instruments are being considered.
As for patterns, it has been said that the current AiB was of the opinion that current bankruptcy favoured debtors too much, and that there was a requirement for the pendulum to return to a position of greater equilibrium. Time will only tell if this ambition is realised, but if not, amending legislation can be introduced, and will be, if BDA(S)A 2014’s goals are not achieved.
If you are a LexisPSL subscriber, click the link below for further information on restructuring and insolvency in Scotland:
Scotland: restructuring and insolvency guide (Subscriber access only)
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First published on LexisPSL Restructuring and Insolvency
Interview by Jo Edwards.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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